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Total damage  =  (60 × $100) + (30 × $1,000) + (10 × $15,000)  =  $600 + $30,000 + $150,000  =  $186,000

If each of the 100 drivers pays a premium of $1,860 each year, the insurance company will collect the $186,000 that is needed to cover the costs of the accidents that occur.

Since insurance companies have such a large number of clients, they are able to negotiate with providers of health care and other services for lower rates than the individual would be able to get, thus increasing the benefit to consumers of becoming insured and saving the insurance company itself money when it pays out claims.

Insurance companies receive income, as shown in [link] , from insurance premiums and investment income. Investment income is derived from investing the funds that insurance companies received in the past but did not pay out as insurance claims in prior years. The insurance company receives a rate of return from investing these funds or reserves. The investments are typically made in fairly safe, liquid (easy to convert into cash) investments, as the insurance companies needs to be able to readily access these funds when a major disaster strikes.

An insurance company: what comes in, what goes out

The illustration shows that premiums from customers and investment income goes to insurance companies, and insurance companies then produce payments to customers, expenses, profits or losses.
Money flows into an insurance company through premiums and investments and out through the payment of claims and operating expenses.

Government and social insurance

Federal and state governments run a number of insurance programs. Some of the programs look much like private insurance , in the sense that the members of a group makes steady payments into a fund, and those in the group who suffer an adverse experience receive payments. Other programs protect against risk, but without an explicit fund being set up. Following are some examples.

  • Unemployment insurance : Employers in every state pay a small amount for unemployment insurance, which goes into a fund that is used to pay benefits to workers for a period of time, usually six months, after they lose their jobs.
  • Pension insurance : Employers that offer pensions to their retired employees are required by law to pay a small fraction of what they are setting aside for pensions to the Pension Benefit Guarantee Corporation, which is used to pay at least some pension benefits to workers if a company goes bankrupt and cannot pay the pensions it has promised.
  • Deposit insurance : Banks are required by law to pay a small fraction of their deposits to the Federal Deposit Insurance Corporation, which goes into a fund that is used to pay depositors the value of their bank deposits up to $250,000 (the amount was raised from $100,000 to $250,000 in 2008) if the bank should go bankrupt.
  • Workman’s compensation insurance : Employers are required by law to pay a small percentage of the salaries that they pay into funds, typically run at the state level, that are used to pay benefits to workers who suffer an injury on the job.
  • Retirement insurance : All workers pay a percentage of their income into Social Security and into Medicare, which then provides income and health care benefits to the elderly. Social Security and Medicare are not literally “insurance” in the sense that those currently contributing to the fund are not eligible for benefits. They function like insurance, however, in the sense that regular payments are made into the programs today in exchange for benefits to be received in the case of a later event—either becoming old or becoming sick when old. Such programs are sometimes called “social insurance.”

Questions & Answers

what economics is all about?
Nomuhle Reply
what is a new paradigm shift
Austen Reply
Paradigm shift it is the reconcilliation of fedural goods in production
Shyline
factors that affecting economic system
Bemen Reply
crux
Shyline
what is microeconomics
Nkanyiso Reply
what is the main problem in our economy
Nkanyiso
crux
Austen
what does crux mean
Shyline
what is demand
Jervis Reply
what are the factors of demand
Jervis
What is money and banking
Dorcas Reply
which one of the bank do product money
Dorcas
central bank
Mohamed
no .... all bank its self...
Buayadarat_Gaming
commercial banking
Mohamed
different types of products banking are .... 1 bills of exchange, 2 leasing, 3 project finance and so on
Mohamed
Demand and supply
Jervis
money can be defined as a medium of exchange
Jervis
how third party insurance premium is calculated?
Eshetu Reply
why scarcity is a problem in economics.
AYAABA Reply
don't worry about it, it's everywhere b/c no resources are full off in the world, b/c geometric increase of population growth.
Eshetu
okay
Shyline
price elasticity of demand is a percentage change in quantity demanded/percentage change in price.
Fadiga Reply
what is the formula for elasticity
Favy Reply
please be specific. Is it elasticity of demand or supply
Moses
we do not have a specific formulae for elasticity but we do have formulae for the types of elasticity and these are the types.Namely price elasticity of demand,Income elasticity of demand and cross elasticity of demand. please be a specific with your question.
Fadiga
sorry elasticity of Demand
Favy
The elasticity of demand is the change in demand due to the change in one or more of the variable factors that it depends on. ... The responsiveness of the quantity demanded to the change in income is called Income elasticity of demand while that to the price is called Price elasticity of demand.
ushindi
price-elasticity-demand-formula Price elasticity of demand = % change in Q.D. / % change in Price
ushindi
what is socialist economics
andy Reply
socialist economics is diffined as the reduction in production possibility curve where as production possibility curve frontial is when it shows the reduction in business and it will also lead to ceteris paribus
Shyline
Socialist economy, is a system of government, in which the means of product is in the hands of the government
Blessing
Change in quantity supplied
Haja Reply
what happened when there is a decrease in investment ?
simeon
what is a minimum wage?
Emelyn
Haja: Change in Quantity Supplied mostly is associated with the supply curve and changes in pricing strategy in response to the changes in market conditions. May in which context are you asking it?
AmarbirSingh
Simeon: When there is a decrease in the amount invested then the amount of funding available is less and the level of production is low leading to less amount of goods and services available for consumption in the economy. Increases on the other hand will lead to development if managed properly.
AmarbirSingh
Otherwise, lead to Bankruptcy
AmarbirSingh
Emelyn: Minimum Wage: This is the minimum sum of money that should be paid to employees across the country to be able to afford a life-style where they can pay their bills on time and have food on the table, roof over their heads and money to travel and commute to and from one place.
AmarbirSingh
Thank you so much, AmarbirSingh Sandhu..
Emelyn
Career Progression and getting your investments right leads to wealth Generation and Management and Transfer.
AmarbirSingh
Emelyn: Your Welcome.
AmarbirSingh
assalam aleykum,I would like to ask if the world has not security what would happen?
Abdoulkarim
how can we define marginal cost I mean I used TC devided Q but teacher said it is not true
Ixtiyor
could you give me exact formula
Ixtiyor
extra
Iyabo
meaning
Iyabo
Emelyn this is the definition of minimum wages. Minimum wage is a least legal wage fixed above the equilibrium(market) wage by the legislative authorities below which it is illegal to employ labour in the labour market.
Fadiga
Two indifference curves cannot cut each other because:
Bilal Reply
because it shows that the business will go down or it will lose profit
Shyline
differentiate between normative statement and positive statement
Nkanyiso
What is scarcity
Ohemaa Reply
What is elasticity
Ohemaa
Elasticity is a tool in economics to Measure the Fluctuations in product price and the Quantity of products and services being sold.
AmarbirSingh
In business and economics, elasticity refers to the degree to which individuals, consumers, or producers change their demand or the amount supplied in response to price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service's
AmarbirSingh
Scarcity is the shortage of raw materials in the economy due to inefficient management and incompetent leadership of xyz authority leading to production and supply issues in correlation to the demand of those products, services and commodities available.
AmarbirSingh
Hope that answers the questions
AmarbirSingh
Have a great day ahead
AmarbirSingh
OK..
Emelyn
Scarcity it is the production of goods in economics
Shyline
Scarcity is not the production of goods in economics.
MARTIN
okay
Shyline
what are the factors that causes change in demand?
Nomuhle Reply
competition for one
Kudzie
okay thanks
Nomuhle
competition for one
Kudzie
Double coincidence of one
Shyline
These are the factors that cause change in demand. (1) Taste and fashion (2)income of the consumer (3)price of related commodities (4)size of the population. (5) weather conditions can also cause change in demand.
Fadiga

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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