Reducing Risks & Insurance (AQA Level 3 Mathematical Studies (Core Maths)): Revision Note

Reducing Risks & Insurance

How does insurance guard against risks?

• Whilst probability can be used to make less risky choices, there is always an element of risk

• Purchasing insurance can help protect against risk and financial loss

• Consider car insurance for example

  • If your car was involved in an accident you would need to pay for repairs or replacement

    • If the crash was with another vehicle, you could be liable for their costs too

  • Paying a yearly or monthly fee for insurance means that the insurance provider will pay these costs instead

    • This is beneficial to the consumer as it is unlikely that most people have enough money set aside to buy another car if it is damaged beyond repair

    • The cost of insurance for a year (or many years) is usually far less than the cost of the car

  • There will usually be an "excess" for the policy

    • The excess is the amount you pay yourself before the insurance company pays - this is usually a few hundred pounds

  • The cost of the car insurance is calculated by the insurance company using expected values and costs

  • This will depend on factors such as:

    • Value of the car

    • Age of the driver

    • Annual mileage

    • If the vehicle is used for commuting or business

    • Driver's history - have they previously had an accident?

    • Location the car is kept

What other types of insurance are there?

• There are many other types of insurance, for example:

  • Home insurance

    • Protects against financial loss from fires or flooding etc,

  • Life insurance

    • Provides financial cover to family or dependents in the case of a death

  • Health insurance

    • Provides financial cover for health conditions and medical bills

  • Appliance or gadget insurance

    • Provides repair or replacement for appliances and gadgets such as washing machines or mobile phones etc.

  • Travel insurance

    • To help cover costs incurred by delays, cancelled flights, lost luggage, or medical emergencies

Do I need insurance?

• Some types of insurance are mandatory

  • In the UK you must have at least third party insurance to drive a car

    • Third party insurance covers vehicles other than your own, if involved in an accident

  • Mortgage lenders will usually require proof of home insurance before finalising a mortgage agreement

• Other types of insurance are up to the consumer to make a decision based on value and circumstances

  • For example, when deciding to insure a new mobile phone or not, this will depend on:

    • The cost of replacing the phone if needed

    • The likelihood of the phone needing a replacement

    • How much money the person has set aside to pay for a replacement

    • The price of the insurance

    • Some of these factors will be harder than others to evaluate!

• Even if the probability of needing to claim on insurance is low, the expected value or cost can still be high, making insurance valuable to the consumer

  • E.g. The probability of a particular house being destroyed due to a natural disaster in a year could be 0.5%

  • This could cost £250 000 in damage, depending on the value of the house

  • The expected cost is 0.005 × 250 000 = £1250 per year

  • Using this expected value makes an insurance cost of say £250 per year seem good value

• Sometimes insurance may not be good value

  • E.g. If a retailer tries to sell consumers insurance for £25 per year for a vacuum cleaner that costs £100

  • This would not be good value unless the vacuum cleaner has at least a 25% chance of needing replacing each year

    • £100 × 0.25 = £25