Fundamentals of queueing networks

The fundamental advantage of insurance

The fundamental advantage that people gain from the insurance market is the ability to control potential risks in their personal lives as well as in their commercial activities. From the standpoint of the economy as a whole, insurance markets do not eliminate risks, but rather spread them more efficiently across the board (Chen, Hong and Yao 15). Obtaining accident insurance, for example, does not reduce the likelihood of a car being involved in a traffic accident. If the terrible occurrence of the accident occurs, it is the responsibility of the insurance provider to reimburse the owner of the car for the previous condition of having the vehicle. Without insurance covers, business persons could avoid taking potentially productive risky business ventures that are instrumental in the growth and development of an entire economy. Insurance cover holders mainly benefit from the insurance in the form of compensations when risks materialize, and losses take place.

The two main problems in insurance companies

The two main problems that impede the insurance companies from working perfectly include the moral hazards and adverse selection. Moral hazards take place where people are likely to have less incentive to be careful about their risky behaviors (Chen, Hong and Yao 16). For example, a car owner is likely to engage in careless driving since they know that in the case of an accident, the insurer will cover much of the losses. Adverse selection happens where the more vulnerable individuals are likely to secure the insurance cover than the low-risk persons (Chen, Hong and Yao 16). In these circumstances, the high-risk persons are likely to benefit more from the insurance protection. The insurers are at times forced to charge higher premiums to the high-risk persons, and this seems like a double-standard scheme where some people are favored over others.

Work Cited

Chen, Hong, and David D. Yao. Fundamentals of queueing networks: Performance, asymptotics, and optimization. Vol. 46. Springer Science & Business Media, 2013.

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