Homework Help is Here – Start Your Trial Now!
Science
Earth Science
In many parts of California, there is a high risk of damage caused by earthquakes, but insurance companies charge very high premiums for insurance because earthquake risk is nondiversifiable (when an earthquake occurs, the company will have to pay many subscribers at once). As a result, the state of California started its own earthquake insurance program for homeowners. The state program is designed to collect enough in premiums to offset the expected cost of an earthquake. Note that this question is NOT about the diversifiability of risk but about the incentives to purchase insurance. (a) The rates charged under this program vary by ZIP code depending on the zip code's proximity to known earthquake fault lines. However, the rates do not depend on soil type. The risk of serious damage from an earthquake is much higher for a house that sits on unstable soil like sand than it for a house that rests on bedrock. Many zip codes are large enough that houses in the same zip code will be built on very different soil types. What will happen to insurance rates and who will buy insurance in this system where the government chooses not to use soil type to help set rates. You can assume that homewoners know what type of soil is under their homes and the government sets the rates in each zip code to cover the average cost of providing insurance to purchasers in that zip code. (1. T 1 o 1. 1:1

In many parts of California, there is a high risk of damage caused by earthquakes, but insurance companies charge very high premiums for insurance because earthquake risk is nondiversifiable (when an earthquake occurs, the company will have to pay many subscribers at once). As a result, the state of California started its own earthquake insurance program for homeowners. The state program is designed to collect enough in premiums to offset the expected cost of an earthquake. Note that this question is NOT about the diversifiability of risk but about the incentives to purchase insurance. (a) The rates charged under this program vary by ZIP code depending on the zip code's proximity to known earthquake fault lines. However, the rates do not depend on soil type. The risk of serious damage from an earthquake is much higher for a house that sits on unstable soil like sand than it for a house that rests on bedrock. Many zip codes are large enough that houses in the same zip code will be built on very different soil types. What will happen to insurance rates and who will buy insurance in this system where the government chooses not to use soil type to help set rates. You can assume that homewoners know what type of soil is under their homes and the government sets the rates in each zip code to cover the average cost of providing insurance to purchasers in that zip code. (1. T 1 o 1. 1:1

Applications and Investigations in Earth Science (9th Edition)
Applications and Investigations in Earth Science (9th Edition)
9th Edition
ISBN:9780134746241
Author:Edward J. Tarbuck, Frederick K. Lutgens, Dennis G. Tasa
Publisher:Edward J. Tarbuck, Frederick K. Lutgens, Dennis G. Tasa
Chapter1: The Study Of Minerals
Section: Chapter Questions
Problem 1LR
See similar textbooks
icon
Related questions
Question
2. In many parts of California, there is a high risk of damage caused by earthquakes, but insurance companies charge very high premiums for insurance because earthquake risk is nondiversifiable (when an earthquake occurs, the company will have to pay many subscribers at once). As a result, the state of California started its own earthquake insurance program for homeowners. The state program is designed to collect enough in premiums to offset the expected cost of an earthquake. Note that this question is NOT about the diversifiability of risk but about the incentives to purchase insurance. (a) The rates charged under this program vary by ZIP code depending on the zip code's proximity to known earthquake fault lines. However, the rates do not depend on soil type. The risk of serious damage from an earthquake is much higher for a house that sits on unstable soil like sand than it is for a house that rests on bedrock. Many zip codes are large enough that houses in the same zip code will be built on very different soil types. What will happen to insurance rates and who will buy insurance in this system where the government chooses not to use soil type to help set rates. You can assume that homewoners know what type of soil is under their homes and the government sets the rates in each zip code to cover the average cost of providing insurance to purchasers in that zip code. (b) In practice, individuals who suffer major economic consequences following disasters like earthquakes, hurricanes, or major flooding are often offered some compensation by the government to at least partially offset their losses, even if they did not have insurance. How does this practice affect individuals' decisions about things like earthquake insurace or where to live?
Transcribed Image Text:2. In many parts of California, there is a high risk of damage caused by earthquakes, but insurance companies charge very high premiums for insurance because earthquake risk is nondiversifiable (when an earthquake occurs, the company will have to pay many subscribers at once). As a result, the state of California started its own earthquake insurance program for homeowners. The state program is designed to collect enough in premiums to offset the expected cost of an earthquake. Note that this question is NOT about the diversifiability of risk but about the incentives to purchase insurance. (a) The rates charged under this program vary by ZIP code depending on the zip code's proximity to known earthquake fault lines. However, the rates do not depend on soil type. The risk of serious damage from an earthquake is much higher for a house that sits on unstable soil like sand than it is for a house that rests on bedrock. Many zip codes are large enough that houses in the same zip code will be built on very different soil types. What will happen to insurance rates and who will buy insurance in this system where the government chooses not to use soil type to help set rates. You can assume that homewoners know what type of soil is under their homes and the government sets the rates in each zip code to cover the average cost of providing insurance to purchasers in that zip code. (b) In practice, individuals who suffer major economic consequences following disasters like earthquakes, hurricanes, or major flooding are often offered some compensation by the government to at least partially offset their losses, even if they did not have insurance. How does this practice affect individuals' decisions about things like earthquake insurace or where to live?
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Recommended textbooks for you
Applications and Investigations in Earth Science …
Applications and Investigations in Earth Science …
Earth Science
ISBN:
9780134746241
Author:
Edward J. Tarbuck, Frederick K. Lutgens, Dennis G. Tasa
Publisher:
PEARSON
Exercises for Weather & Climate (9th Edition)
Exercises for Weather & Climate (9th Edition)
Earth Science
ISBN:
9780134041360
Author:
Greg Carbone
Publisher:
PEARSON
Environmental Science
Environmental Science
Earth Science
ISBN:
9781260153125
Author:
William P Cunningham Prof., Mary Ann Cunningham Professor
Publisher:
McGraw-Hill Education
Earth Science (15th Edition)
Earth Science (15th Edition)
Earth Science
ISBN:
9780134543536
Author:
Edward J. Tarbuck, Frederick K. Lutgens, Dennis G. Tasa
Publisher:
PEARSON
Environmental Science (MindTap Course List)
Environmental Science (MindTap Course List)
Earth Science
ISBN:
9781337569613
Author:
G. Tyler Miller, Scott Spoolman
Publisher:
Cengage Learning
Physical Geology
Physical Geology
Earth Science
ISBN:
9781259916823
Author:
Plummer, Charles C., CARLSON, Diane H., Hammersley, Lisa
Publisher:
Mcgraw-hill Education,
SEE MORE TEXTBOOKS