Risk averse means is a situation whereby individuals are willing to pay some money in order to avoid playing a risky game; this takes place even when the expected game value is in this individuals favor. Risk aversion is thus a theory that explains why people are always willing to buy insurance.
In dollar terms we can say that taking an insurance cover is a gamble whose expected value gives a negative figure.
A risk averse individual tends to pay more than the expected value of a game that will let him or her avoid a risk. For example, if an individual faces a 4/100 chance of losing 20,000 pounds risk aversion means that the individual will pay more than the expected value of 800pounds for an insurance policy that will reimburse him for that 20,000 pounds loss if it happens.
Indemnity is a principle of insurance that states puts it clearly that an insured person will only get compensation if there is a risk occurrence. On the other hand if the event does not occur then the insured will not get any compensation whether money or property. In this case the insurance company will benefit a lot since all the premiums paid will remain as the company's revenue.
Many people in this small island will pay for insurance which will result into a lump sum insurance pool. Out of the risk insured against the likely hood of an event occurring will be very minimal a suggestion that the insurance company will stand to gain because it will pay out less money as compensation a thing that makes it stay in business.
The pay off expected by the insured is always less than the premiums he pays; this puts the insurance company in a better position making it a booming business with minimal chances of los ...