Final answer:
The question discusses how an insurance company operationally manages risk and collects premiums to cover the costs of automobile accidents. It provides an example where 100 drivers each pay a $1,860 annual premium to fund a pool of $186,000, used to pay for various accident-related damages.
Step-by-step explanation:
The subject in question pertains to the business operations of an insurance company, particularly how it collects premiums and pays out claims following automobile accidents to ensure coverage of costs.
A scenario is presented where 100 drivers are divided into groups based on the severity of accidents they might encounter, and each driver pays a $1,860 premium annually.
This pooling of resources by the insurance company is essential for it to accumulate $186,000, which is the amount necessary to cover the different costs of incidents ranging from minor to major across the group.
Using a simplified example, if we have 60 drivers with minor repairs costing $100 each, 30 drivers with medium-sized accidents at $1,000 each, and 10 drivers with substantial damages costing $15,000 each, the total expenditure by the insurance for these accidents amounts to $186,000.
This is offset by the collected premiums, representing the shared risk and the principle behind insurance policies.