What does Insurance Demand require?

What does Insurance Demand require?

• A. Individuals must be willing to buy insurance at the stated premium
• B. Insurers must be willing to offer insurance
• C. The premium must be actuarially fair
• D. The risk must be completely predictable

Answer: (A)

The key idea is that demand for insurance exists only when people are willing to pay the stated premium for the protection it provides. If a consumer isn’t prepared to pay that price, there is no demand, regardless of how good the policy is. The other statements mix in the supply side, the idea of actuarial fairness, or the nature of risk; none are required for demand to exist: insurers offering coverage relates to supply, not demand; the premium doesn’t have to be actuarially fair—the value a person places on protection and their budget can drive demand even at higher prices; and risk doesn’t have to be completely predictable since insurance is about hedging uncertain events.

The key idea is that demand for insurance exists only when people are willing to pay the stated premium for the protection it provides. If a consumer isn’t prepared to pay that price, there is no demand, regardless of how good the policy is. The other statements mix in the supply side, the idea of actuarial fairness, or the nature of risk; none are required for demand to exist: insurers offering coverage relates to supply, not demand; the premium doesn’t have to be actuarially fair—the value a person places on protection and their budget can drive demand even at higher prices; and risk doesn’t have to be completely predictable since insurance is about hedging uncertain events.