Learn Before
Consequences of Underpriced Insurance
An insurance company is considering offering a new type of policy. After analyzing historical data, they calculate that the expected annual claim payout per policyholder is $150. However, to attract more customers in a competitive market, they decide to set the annual premium at $120. Assuming the company's calculations are accurate and ignoring administrative costs, explain the long-term financial outcome for the company if it sells a large number of these policies. In your explanation, identify the core principle being violated.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Introduction to Microeconomics Course
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
Related
Incompleteness of Insurance Contracts due to Hidden Actions
An insurance company is developing a new policy to cover bicycle theft. The company determines that the average value of a covered bicycle is $1,000 and that, in any given year, there is a 4% chance a bicycle will be stolen. Ignoring administrative costs and profit, what is the minimum annual premium the company must charge each customer to cover its expected payouts?
Flood Insurance Premium Viability
Consequences of Underpriced Insurance
Two farmers, A and B, can grow either wheat or corn. Initially, they operate in a system where Farmer A, who owns the only water source, decides how much water each gets, leading to Farmer A producing 80% of the total crop value. Later, a local council implements a new water-sharing policy that guarantees both farmers equal access to water. Under this new policy, both farmers produce an equal 50% of the total crop value. What is the fundamental reason for the change in the distribution of crop value between the two scenarios?
Evaluating Premium Viability for a Novel Insurance Product
An insurance company that sets its premiums for a specific policy precisely equal to the expected value of the claims for that policy is guaranteed to make a profit from that policy line.
An insurance company is calculating the break-even premium for a new smartphone insurance policy. The policy covers a phone valued at $800. The company's data suggests a 5% probability that a customer will file a claim for the full value of the phone in a given year. Match each component of the calculation to its correct description or value based on this scenario.
An agricultural insurance company offers a policy that covers the total loss of a farmer's corn crop, valued at $50,000, due to a specific type of blight. The company estimates the probability of this blight occurring in any given year is 2%. To exactly cover its expected payouts, without considering administrative costs or profit, the company must charge an annual premium of $____.
Insurance Premium Setting Based on Expected Claims
An insurance company is launching a new policy to cover a specific type of risk. Arrange the following steps in the logical order the company must follow to determine its minimum break-even premium, ignoring administrative costs and profit.
Diagnosing an Unprofitable Insurance Policy