Melinda: Hazard insurance decreases an individual's risk by judiciously spreading the risk among many policyholders....

shunhe on August 11, 2020

Hi @jam0086@mix.wvu.edu,

Thanks for the question! So let’s walk through what’s going on here. Melinda says that hazard insurance decreases a person’s risk by spreading it among many policyholders. What’s Melinda talking about here? She’s talking about financial risk. It decreases your own personal risk because you pay into this piggy bank that’ll pay you out if your house catches fire. So your risk of getting financially wrecked after a fire goes down significantly with a fire insurance policy.

Jack replies and disagrees. Jack says sure, it makes sense to get fire insurance, but I don’t see how that lessens the chances that my house will burn down. What’s Jack talking about? Well, he’s talking about a different “risk” than Melinda is! Jack is talking about the actual probability that his house burns down, which wouldn’t necessarily go down just because someone brought fire insurance. So the ambiguity here is in the word “risk,” since Melinda uses it in a financial sense, and Jack uses it to talk about the actual probability of the house burning down. And that’s what (C) says, which makes it the correct answer choice.

Hope this helps! Feel free to ask any other questions that you might have.