General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
Two risks have the same expected loss. Risk X produces many small claims; Risk Y produces rare but very large claims. Which statement is correct for the insurer?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Both risks can be priced from group experience, but their loss patterns matter enormously. Risk Y's rare, severe claims create large single exposures that can deplete reserves in one event, so the insurer needs stronger surplus, more reinsurance, and higher capital backing. Frequency and severity together define the distribution of claims, and insurers manage the two patterns very differently.
Why the other options are wrong
- B) Small, frequent claims are administratively manageable and highly predictable; they do not make a risk uninsurable.
- C) Rare large claims are still insurable; insurers handle them with reinsurance and capital rather than declaring them uninsurable.
- D) Expected loss alone does not capture risk; the distribution — frequency and severity — drives reserves, reinsurance, and solvency planning.
Memory hook
Same bill, different shock. Many small hits are noise; one giant hit is a crisis needing reinsurance.