Tune In to Insurance
Students will understand:
- How to estimate costs and make inferences and predictions from data.
- How to use cost-benefit analysis to make decisions.
Activity 3 (PDF); Internet access or office-supply catalogs; Calculators
- Divide students into groups of 3-4. Have each group imagine they are co-owners of a small used CD and DVD store in a tornado-prone area.
- Distribute copies of Tune In to Insurance (PDF), and go through question 1 to estimate the store's total value.
- Tell students they must choose whether to purchase an insurance policy to cover them if they were to lose their business in a tornado. Discuss insurance coverage. Explain that coverage for catastrophic events like tornadoes must be purchased separately from a basic policy, at greater cost.
- Discuss cost-benefit analysis. Explain that it's a way of evaluating the advantages (benefits) and disadvantages (costs) of a particular purchase, investment, or course of action. Explain that actuaries use cost-benefit analyses in the real world.
- Questions in the reproducible guide students through a cost-benefit analysis for making decisions about insurance. Review students' answers. Discuss the costs and benefits of having tornado insurance.
Actuaries use cost-benefit analysis to help analyze the cost of possible events for insurance companies. They assess the risk of certain events in particular areas according to what they refer to as the "peril-type," and by the cost associated with each type of peril. Using this data, they help insurance companies adjust their business approach and set their fees in a way that helps them reduce their financial risk. (Suggestion: As an added bonus for your students, you may wish to invite a local insurance agent for a guest presentation.)
For the Fujita Tornado Damage Scale, visit www.spc.noaa.gov/faq/tornado/f-scale.html.