The Ideal Insurance System

question 57

Multiple Choice

The ideal insurance system:

• A) reduces the probability of accidental and fortuitous losses due to increased predictability
• B) requires the transfer of a large number of exposures to loss to a pool, where a fund exists in advance of losses having to be paid
• C) works best when a large proportion of the participants in the pool submits a claim
• D) eliminates all hazards

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Definitions:

Semiannual Compounding

A method of calculating interest where the capital is compounded twice a year.

Compounded Semiannually

An interest accruing method where interest is calculated and added to the principal every six months, potentially leading to higher returns over time due to the compounding effect.

Quarterly Compounded

The process of calculating interest on both the initial principal and the accumulated interest from previous periods, done every quarter.

Effective Rate

An adjustment of the nominal interest rate on a loan or financial product to reflect an annual compound interest rate, with payments made at the end of the period.