[amp_mcq option1=”High frequency and low loss everity” option2=”Low frequency and high loss severity” option3=”Minimum frequency and no loss severity” option4=”High frequency and high loss severity” correct=”option2″]
The correct answer is B. Low frequency and high loss severity.
Insurance is a contract between an insurer and an insured, where the insurer agrees to compensate the insured for losses incurred as a result of a specified event in exchange for a premium paid by the insured. The risk of loss is transferred from the insured to the insurer.
The frequency of a loss is the number of times that a loss occurs in a given period of time. The severity of a loss is the amount of money that is lost in a single event.
Low frequency and high loss severity means that a loss is unlikely to occur, but when it does, it will be very costly. This type of risk is best suited for insurance because the insurer can spread the cost of the losses over a large number of insureds.
High frequency and low loss severity means that a loss is likely to occur, but when it does, it will not be very costly. This type of risk is not well-suited for insurance because the insurer will have to pay out a lot of money in claims, even though the losses are not very large.
Minimum frequency and no loss severity means that a loss is very unlikely to occur, and when it does, it will not be very costly. This type of risk is also not well-suited for insurance because the insurer will not be able to make any money from the premiums that are paid.
Therefore, the best type of insurance for a risk with low frequency and high loss severity is an insurance policy that has a high deductible. This means that the insured will have to pay the first few thousand dollars of any loss, and the insurer will only pay out the remaining amount. This type of policy is less expensive for the insured, and it also protects the insurer from paying out large claims.