PDF’s of today’s class problem and solutions are available here:

Note also that the probability of a loss exceeding $1,500 when *n *=1 (i.e., when there is no risk pooling) is:

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This problem showcases the tremendous advantage afforded to consumers from the pooling of risk, by reducing the probability of a large loss by almost 60% when risks are *iid *and *n *=5 (question 1), and by reducing the probability of a large loss by more than 80% when risks are *iid *and *n *=10 (question 2). However, the introduction of positive correlation in question 3 significantly reduces the efficacy of risk pooling, since for *n *=10 and , there is a 12.57% probability that the loss on an average policy will exceed $1,500.