Question

Jill loses an eye in an automobile accident unrelated to her work. She collects $10,000 from an accident insurance policy carried by her employer. The benefits are paid according to a schedule of amounts that vary with the part of the body injured (e.g., $10,000 for loss of an eye and $20,000 for loss of a hand). Jill is absent from work for a week as a result of the accident. Her employer provides her with insurance for the loss of income due to illness or injury. Jill collects $500.

Answer 1

The student's question revolves around understanding accident insurance payouts and the concept of insurance premiums. The example used demonstrates how insurance companies calculate premiums to cover the cost of accidents over a group of policyholders, emphasizing the importance of shared risk.

Step-by-step explanation:

The student's question pertains to how accident insurance payouts work and involves understanding insurance premiums as a financial concept. A simplified example of automobile insurance demonstrates how premiums are collected to cover potential losses. With a hypothetical group of 100 drivers, we consider three risk levels: 60 drivers with minor incidents (door dings or chipped paint) costing $100 each, 30 drivers with mid-level accidents costing $1,000 each, and 10 drivers with large accidents costing $15,000 each. The total damages sum up to $186,000.

In this scenario, if each driver pays an insurance premium of $1,860 annually, the insurance company collects the necessary funds to cover the aggregate cost of accidents. This example underlines the method by which insurance companies set premiums to ensure that there are sufficient funds to pay out claims. It also illustrates the shared risk principle - where all policyholders contribute to a common fund to cover the individuals who incur losses.