Insurance companies have some advantages in bearing risk; these include:
I. Superior ability to estimate the probability of loss
II. Extensive experience and knowledge about how to reduce the risk of a loss
III. The ability to pool risks and thereby gain from diversification
IV. Insurance companies cannot diversify away market or macroeconomic risks

Question

Quizplus · Accepted Answer

Insurance companies have superior ability to estimate the probability of loss because they have access to a lot of historical data and statistical analysis. They have extensive experience and knowledge about how to reduce the risk of loss by using various techniques. They also have the ability to pool risks from different customers and thereby gain from diversification. However, insurance companies cannot diversify away market or macroeconomic risks because they are beyond their control.

Insurance Companies Have Some Advantages in Bearing Risk; These Include