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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

explain scarcity
Richard Reply
scarcity occurs when there are not enough resources to satisfy human's needs and wants therefore we need to allocate our resources using the price mechanism.
scarcity is when there is inadequate resources to catch the unlimited wants which would compel individual to make choice.
joint or complementary demand
Ryt Reply
what is demand
Qudus Reply
it maybe define as the amount or quantity of goods and services which a consumer is willing to buy with the ability to pay at a given price at a particular time
yesoo thanks dear
why is economics a science
Isaac Reply
Because science is all about thinking by making models whether a computational or Mathematical. Economics is a social sciences because it effects society but to understand Economics we use maths so it is a Science
I hope.......Economic is social science because it makes new new currency of money,it is decided the country’s depend system and the system be repeated others benefits in our ...
so what is the disadvantages of mix economic system
Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organisations.
The question is: why is Economic a "science" and not why is economics a "social science?" Alright folks?
In my own understanding of why economics is a science it bcz it deals mainly on human resources just like biology that deals in the human body why economics is science it also deals on the management of human resources all over the world bcz without economics there will be no human resources
what is technology
my response to the earlier question is, economics is a science but not a pure science like biology, chemistry and physics. The reason is that those pure science study inanimate object while economics study human being, their experiment are predictable.
Economics is a social science subject that shows the relationship between ends and scarce means with their alternative uses
what is Equilibrium?
Fatima Reply
it means equal price and equal quality
thank u Arthur!
Equilibrium is a state of balance in an economy. In as far as market forces are reasonably concerned, equilibrium means the state at which the quantity of goods supplied is equal to the quantity of goods demanded.
what is labour
labor can be define as a both physical and mental effort of man put forward towards production
name the types of demand and explain any two
Joint demand Composite demand Competitive demand
Labourcan be defined as man mental and physical exertion
what is elasticity
Motseoa Reply
difference between demand and supply
Adeyemi Reply
Demand- It is the desire of a buyer and his ability to pay for a particular commodity at a specific price. Supply- It is quantity of a commodity which is made available by the producers to its consumers at certain price.
yes OK thank you dear
Demand can be defined as the ability a buyer is willing and able to pay at a specific price and in agiven period of time Supply can be defined as the ability the producer is willing to supply with a specific price
what is labor force
restriction on international trade
Ayim Reply
formula for price elasticity of demand
Lognyuu Reply
what is average cost advantage and absolute cost advantage
Tamo Reply
what is demand
Home Reply
demand can be defined as the quantity of a commodity which people are willing to buy at particular times and at a given price .
you are talking about campaney in my self ihave campaney why don't you calculated my business
Adow Reply
formula for price elasticity of demand
Emilia Reply
Suppose that a soft drink company calculates that the demand for a bottle of its soda increases from 100 to 110 after the price is cut from $2 to $1.50.
The price elasticity of demand is calculated as the percentage change in quantity demanded (110 - 100 / 100 = 10%) divided by a percentage change in price ($2 - $1.50 / $2).
what does unit price mean
Lognyuu Reply
unit price is the price for a single unit of measure of a product sold in more or less than the single unit.
How do we find unit price?
divide total cost by total units
I don't understand the unit Price
which one how find or what
sorry how to find it or what
please how do we find the unit price
unit price or cost is the price per item when you purchase in a bulk
example assuming you bought a pack of matches is 1gh but the pack contains 10 boxes so the price per the box is called the unit price ie divide 1gh by the number of matches boxes in the pack to get unit price/cost. NB unit here means one so price per 1
you will divide total cost by total unit
yes please
yes, in the matches scenario it's 1gh/10boxes which is equal to 0.10ps so the unit price of the one box of the matches is ten Ghana pesewas
Thank you I now understand
Given that the price of a product has rose, the demand of the the product will decrease. Thus leads to a downward-sloping demand curve
M_geshnee Reply
The demand of consumers
No demand curves have différent shapes. For examole guven that price of a product increase, the demand of that product will decrease thus It will lead to a downward sloping curve conversely there can be also a rightward shift in the demand curve when price a the good decrease demand will increase

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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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