coverage unless required to do so. On the other hand, a risk-averse party would be
willing to pay a higher price than the expected loss to avoid the negative consequences
of a large loss.
An insurer normally relies on risk pooling and the law of large numbers when
providing coverage against a specific risk. If the risks are independent and there are a
significant number of policyholders, then the variance in the expected loss is very small
so the insurer can estimate with some degree of accuracy how large its annual claims
payments will be on average.
A benchmark model of insurance supply assumes ...
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