Answered: In order to remain competitive,…

In order to remain competitive, insurance companies must successfully address: A. Adverse Selection B. Moral Hazard C. Accurate underwriting (pricing of risk) D. All of the above E. None of the above

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 4CQQ

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Question

QUESTION 36

In order to remain competitive, insurance companies must successfully address:

A.

Adverse Selection

B.

Moral Hazard

C.

Accurate underwriting (pricing of risk)

D.

All of the above

E.

None of the above

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Risk selection" refers to -- a. the incentive of insurance companies to avoid enrolling people who are in worse health and likely will require costly medical care. b. the phenomenon of individuals waiting until they are sick before purchasing health insurance. c. the process by which the Federal government identifies individuals at greatest risk for needing costly health care and provides them special high-risk insurance coverage. d. the incentive of shareholders to avoid investing in insurance companies which insure the most high risk patients.
Q1. Insurance works by spreading risk over - a. the uninsured b. a few people c. several insurance companies d. Many people Q2. Determining the risk associated with a particular group or activity is called - a. discounting b. risk determination c. forecasting d. underwriting
The difference between the actuarily fair price for insurance and the price a risk-averse individual is willing to pay to fully insure is called a-insurance benefit b-risk aversion c-the risk premium d-risk profit
In order to remain competitive, insurance companies must successfully address: A. Adverse Selection B. Moral Hazard C. Accurate underwriting (pricing of risk) D. All of the above E. None of the above
In this simple insurance model, a company has a monopoly over a small market. There are 100K potential customers with a low risk profile, 60K potential customers with a medium risk profile, and 10K potential customers with a high risk profile. A person’s risk profile is important as it determines how much insurance is worth to the customer and how much money the customer will cost on average to the insurance company. The following table summarizes the estimates put together by the company: Low risk profile Medium risk profile High risk profile Number of potential customers 100,000 60,000 10,000 Expected expense per customer $2K $7K $15K Maximal price the customer isready to pay for insurance $3K $8K $16K Remark: Explaining where these numbers come from would require a subtler model that describes the risk covered by the insurance policy. While there is no need to do this for the purpose of this exercise, notice though how the maximal price…
If people get higher pay from insurance than their pre premiums. Will this increase or decrease the death rate of average persons? Is this an example of moral hazard or adverse selection? How will an insurance company deal with these problems.
Which of the following is considered insurance producer misrepresentation?A. Switching from one insurance coverage to a better one.B. Declaring that dividends will be paid. C. Representing many insurance companies simultaneously D. Requiring an insurance applicant to pay their premium to the insurance company.
The problem of adverse selection in insurance markets means that it is generally a bad deal for companies to offer insurance at the same price for all potential customers. Why then do we observe some insurance companies (such as those selling “trip insurance” that refunds money to people who purchase trips that they are unable to take) do exactly this?
The key concept that explains why individuals choose to obtain insurance and why they may be less likely to gamble with their wealth is: a. increasing marginal utility in wealth b. constant marginal utility in wealth c. decreasing marginal utility in wealth
B 2 Consider a pool of potential consumers of insurance with a known probability of sickness, p=0.5. Also consider that there are many competitive insurance firms that operate in the same manor, with the same operating costs. A. In the IH/IS space, show a random endowment point, E, the zero-profit line (calculate the slope), a full insurance line and an indifference curve that contains point E. Show the set of feasible contracts and explain what conditions hold that make the contracts feasible. B. On your graph, label equilibrium point Z. Why is equilibrium at point Z?
How might adverse selection make it difficult for an insurance market to operate?
Name two solutions to adverse selection in insurance and explain how they work.