Monday, March 09, 2009

Insurance (2) - Risk Remains

Insurance pools risk, but it does not eliminate it. When all the people in a city take fire insurance, the risk is transformed, but it is now concentrated in the insurance company. If dishonest people gain control of the insurance company, and embezzle the premiums and reserved held in trust, the company might default on its promise to rebuild houses that are burnt down. The risk of the insurance company defaulting is even lower likelihood than the risk of a fire, but the impact is even greater. The people of the city can spread this risk by dealing with several insurance companies, but the risk can never be totally eliminated.

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