Quote:
Originally Posted by whswhs
I don't think that's needed in the case you propose.
You specify 10% chance in a 25-year period. That's a 0.4% chance in a single year. So out of 250 policyholders, one will need a payout of $10,000 that year, in the long-run average. To cover it, the company needs to take in $10,000, and dividing that among 250 policyholders comes to $40. As long as the company has a large enough pool of policyholders to spread the risks over in a given year (if it has only 250, there's a risk of having two payouts and going broke!), it doesn't matter if they're the same policyholders from year to year.
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I am not sure we are saying anything different?
So at 10%, 250 policy holders means 25 claims in 25 years or an average of 1 per year (as you say). Overall there needs to be at least 250,000 in premiums over 25 years. It doesn't matter if you say 40 per year per policy holder, or 1000 over 25 years per policy holder.
Having more policy holder certainly spreads your risks.
In the above I am glossing over the adjustments that would really have to be made to factor in inflation and the fluctuations in the value of money and services over the 25 years policy period and any required profits (I do that in my job, I am not willing to do it in my leisure time as well).