Advanced Microeconomics - Consumer Theory (Marshallian and Hicksian Demand), Adverse Selection and Moral Hazard in the Case of Insurance

Insurance is an arrangement by which a company gives customers financial protection against loss or harm such as theft and illness in return for premium payments. One of the most important ways that external economic factors are affecting insurance industries is by experiencing a slow pattern in the economy. Insurance companies are affected by lower sales and lower rates of returns on their investments. Companies have to sell certain products for which they have the commitment and the

Agency owner Drew Miles describes the policy holders served by his team of Farmer's agents as “confident planners” - people who understand the importance of having exactly the right insurance coverage to protect their years of prudent

Here, the patients’ know their health needs but the insurers merely work with the average distributions of healthcare needs of entire the population. Insurers cannot accurately deduce the costs associated with each individual patient. This lack of information poses a dilemma in determining a reasonable price. In order to insulate from costs associated with variations in utilization, the insurer determines a price that accounts for average health expenditures. At this level, however, the individuals who perceive their health expenditures to be ‘below average’ that is they anticipate lower health needs will withdraw from the market without insurance. Due to the withdrawal of low utilizers the average health expenditure for the population increases further, driving other healthy, low utilizers from the market. Eventually, only the sickest individuals who have extremely high health care needs remain in the market. In this scenario, the market unravels and all potential gains are not

An insurance policy is a contract between two parties: you and the insurance company. Both of you have obligations that are laid out in the insurance policy. While many insurers often act like they can do what they want when it comes to paying claims, insurance companies still have contractual obligations laid out in the policy.

Basically, the insurance company banks (literally) on the idea that after years of fighting with the carrier, customers will be so relieved

Consumers are utility maximisers, they maximize their utility by taking a decision when they buy something. They spend money on those things which are cheaper as well as qualitative for them. As shown in the fig.1, the budget line illustrates the limits of a consumer’s choices. The area left side the budget line is affordable by consumer.

Uninsured financial loss can harm the individual, his or her family, and any employees the individual may have. Financial loss can effect following generations due to an inability to fund higher education or to fund the development of a trade or skill. Financial harm to members of society can cause a loss of economic health to the public, since business owners may have to lay off employees or may go out of business if the financial harm is severe enough. Because there is an element of welfare in our society, those financially harmed could potentially look to the government for the funds for housing, food and education lost due to the uninsured financial harm, causing taxes to rise. Speaking of taxes, businesses and their employees forced out of work due to uninsured risks do not earn any income on which to pay taxes. Because of all these negative potentialities, insurance is viewed as an important industry, whose well-being benefits the public-at-large. Hence, any unethical conduct by agents have multiple bad effects.

Mark Thomas in his article Explainer: what is “moral hazard”? states that moral hazard is a term describing how behavior changes when people are insured against losses. He goes on to further explain by giving an example of having a fully insured car. “If your car is fully insured against any and all damage and there is no deductible, then you would have no incentive to avoid minor accidents, like scratches or backing into poles, beyond the inconvenience of getting the car fixed. You would be much more likely to take risks that could lead to minor car damage knowing that any damage is fully covered” he states. The moral hazard problem is the tendency of one party to a contract or

Perhaps one way to analyze the situation is through concepts of loss-shifting and loss-spreading. I would anticipate such insurers directly or directly support tort reform aimed at limiting the quantum of damages. On the other hand, I would be surprised if they supported substantial removal of the right to sue in tort, because that is part of their business. (Journal of Patient Safety) Anyone with a valid claim stands to receive compensation, but only up to a specified amount, which often leads to dissatisfaction and complaint There are qualitative factors, of course, that add to the complexity of these scenarios. I believe there are some interesting studies around no-fault apology that might contribute to a reduction in claims, for example. It would also be interesting to see what improvements collaborative law processes might bring.

The journal article, “INSURANCE COVERAGE FOR BUSINESS TORT CLAIMS ALLEGING INTENTIONAL WRONGDOING” was published to show the rights that insurance companies have regarding denying people coverage. Sectors thesis statement is as follows, “Like the punter who kicks the ball too far, the business litigation plaintiff sometimes pleads or proves that the defendant was not merely negligent, but reckless, intentional, or malicious” (Spector, 2015. Para. 2). One example used by Larry Spector, the author, is about a kicker on a football team. If the insurance company finds an incident where the insured persons has been negligent then the company can “out kick” the coverage that they first quoted the individual with (Spector, 2015). The two main points of the article are, public policy

Most people don't really understand everything that there is to know about insurance unless their very diligent or work in that industry. It's the same as how most people don't know a lot about taxes, so they leave it up to their accountant to do it for them and make the vital decisions. The same goes with most people buying insurance, the only difference is that an insurance broker or salesman is mainly in it to make money on commission, and so it's up to you to know as many details as possible in order to not overpay, or sometimes more importantly to not underpay - which can lead you into a financial mess when a tragedy strikes and you're not fully

Insurance allows people, organizations and different elements to ensure themselves against significant potential misfortunes and money related hardship at a sensibly reasonable rate.

During my insurance career, an unfortunate event took place as a result of a poor decision that I made by a General Agent in the agency where I conducted my daily work duties. The General Agent went behind my back and pulled contracts that I had with a broker in Florida and convinced the broker that I was not the Agent over one of the life insurance policies that I wrote while conducting business at a local Union. The commissions that the insurance company was liable for according to a contractual agreement signed by me and the insurance company were to be divided into four separate payments only to me: one payment every quarter in the amount of $1001.50 each.As mentioned above, there was a Florida brokerage company that was involved in some

Answer: Property and casualty insurance protects property (houses, cars, boats, and so on) against losses due to accidents, fire, disasters, and other calamities. Property and casualty policies tend to be short-term contracts and, that’s why the subject to frequent renewal is, and one more characteristic feature is the absence of savings component. Property and casualty premiums are based on the probability of sustaining the loss. To estimate the key determinant of the price of an insurance policy, i.e. risks, insurance companies take third-party proceedings that develop models of catastrophe loss probabilities. Based on the numbers form Exhibit 5 of the case we see that

There is a spacious room for lemon in insurance field. The price for health insurance is not fixed, it varies based on the level of the need an applicant may require for the insurance. As in the case of elderly people over the age 65, it is well known that it is very difficult for them to get health insurance because of its high price as they certainly will need it more than other applicants. On the other hand, employees working in companies are offered health insurance as a part of the companies’ policies and regulations. This actually create more room for lemon in the insurance field and less chance for old people who need it more. This ended up with adverse selection by the insurance companies. (A.Akerlof, Aug