chapter 7

chapter 7


People do not like risks and unexpected unpleasant events. This is called risk aversion: people are averse to risks and shield themselves against them by taking out insurance. An insurance is an agreement between an insurer and an insured, whereby the insured, on payment of a periodic amount, gets the guarantee that damage to the insured will be reimbursed by the insurer. The amount that the insured pays the insurer periodically is called the insurance premium, or premium for short. Taking out insurance yes or no is a matter of choice. In this process the costs of the insurance are weighed against the financial risk that you run.

Insurance scan be subdivided into private and group insurances. With private insurances you decide yourself whether you will take out insurance and also for what amount. With group insurances the government obliges everyone involved to take part and it is also laid down what benefit or indemnification you get. There are group insurances to cover the financial consequences of sickness, invalidity, old age, and so on.

The Social Insurance Bank, administrator of the AKW, AOW and Anw (www.svb.nl)
Ageing of society (video 4 minutes)


Glossary chapter 7

adverse selection
Adverse selection means that people with a high risk (‘bad risks’) do take out insurance and people with a low risk (‘good risks’) do not.
capital funding system
Capital is formed from individual premiums for the financing of benefits in the future.
cost allocation system
Received (social) premiums in a year are used for paying the benefits in that year.
inflation proof A benefit is index-linked if it increases by the same percentage as the inflation rate.
Agreement between an insurer and an insured person whereby the insured pays an amount to the insurer, who in return gives the guarantee that in case of damage the insured is compensated for this damage.
moral hazard
Moral misconduct: the hazard of people or institutions starting to behave carelessly and irresponsibly, when they do not have to foot the bill themselves.
premium Amount which you pay to an insurance company, so that you are insured against financial consequences of unexpected agreed events.
premium differentiation
Differences in premium. Bad risks pay more premium than the good risks.
A benefit is prosperity-linked if it increases by the same percentage as the average increase in collective bargaining agreement (cao) wages.
risk aversion
Disliking risks for fear of unexpected harmful events.