Economics of Insurance

Unit-wise Topics Number of Lectures Sub-total

Part 1. Economic Foundations
Expected utility 1
St. Petersberg paradox, Bernoullis solution 1
Von Neumann Morgenstern Expected utility theorem, 1
Insurance and Risk Aversion - Risk preference, Demand for full insurance, maximum
premium, Insurance at Fair Odds, Partial Insurance, Insurance Market-State Space
Approach, contingent commodities, Zero profit constraint, odd price ratio 4
7
Part 2. Asymmetric Information and Insurance
Moral Hazard and Insurance ( the hidden action problem) 2

Insurance and Selection Problems - Single Crossing Property, Imperfect information,

Pooling, contract, separate insurance, Self selection constraint, separating equilibrium 4
6
Part 3. Risk Management and Insurance
The concept of risk; Business risks and Individual risks 1

Risk management methods-loss control, loss financing and internal risk reduction methods 2

Frequency of loss, magnitude and severity of loss; Important distributions of claim costs 2

Diversification and polling arrangement - contract costs, Diversification of underwriting risk,

Reinsurance - Proportional and non proportional contracts, Insolvency issues 3
8
Part 4. Insurance Pricing and Selective Insurance Products

Future life time random variable, its distribution function, force of mortality, curtate future
life time; Deferred probabilities; analytical laws of mortality-Gompertz, Maheham 2
Single decrement life table, select and ultimate life table. 1
Types of insurance products; life and health insurance term, endowment and whole life
policies; universal and variable life; group insurance; annuity contracts with level and
varying benefits 2
Pricing Fundamentals – fair premium; fair profit loading 1

Actuarial Science pricing techniques - individual risk theory and collective risk theory 3
Financial pricing techniques of Insurance - Insurance Capital Asset Pricing Model, Present
value model and option pricing model 3
12
Part 5. Experience Rating and Credibility Theory
Aggregate claim distribution for short term insurance contracts and application of binomial,
Poisson, negative binomial distribution and normal distribution 3
Experience or merit rating, Risk classification, Bonus Malus System 2

Credibility theorem-Empirical Bayes approach to credibility theory, credibility premium

formulae and standard elementary models, credibility premiums, full and partial credibility 3
8
Total Number of Classes 41

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