An insurance policy is a contract that:
A)benefits the parties if they have the same degrees of risk aversion.
B)benefits the parties if both of them are risk neutral.
C)benefits the parties if they have different degrees of risk aversion.
D)benefits the parties if either of them is risk neutral.

Question

Quizplus · Accepted Answer

An insurance policy benefits both parties if they have different degrees of risk aversion. The insured party, who is risk averse, pays a premium to transfer the risk of a potential loss to the insurance company, who is typically less risk-averse. Therefore, both parties benefit from the transaction. If both parties had the same degree of risk aversion, there would be no advantage to either party in the insurance transaction. If either party is risk neutral, they would not need or receive the benefit of transferring the risk.

An Insurance Policy Is a Contract That