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Limitations of Deductibles as a Screening Tool
While offering a menu of insurance plans with different deductibles can effectively screen customers by risk, this mechanism is not perfect. For instance, an individual's choice may be influenced by their degree of risk aversion or wealth, not just their inherent risk level. A very risk-averse but low-risk person might still opt for a low-deductible, high-premium plan. Conversely, a high-risk individual with limited income might be forced to choose a high-deductible plan, confounding the signal the choice sends to the insurer. These factors can limit the effectiveness of deductibles as a pure screening device.
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Economics
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
CORE Econ
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An auto insurance company offers two plans: one with a high premium and a low deductible, and another with a low premium and a high deductible. The company expects low-risk drivers to choose the low-premium plan and high-risk drivers to choose the high-premium plan. However, they observe that a particular customer with a flawless driving record and a very safe car consistently chooses the high-premium, low-deductible plan. What does this customer's choice most likely reveal about the limitations of this screening mechanism?
Evaluating an Insurance Screening Strategy
Confounding Factors in Insurance Screening
A specialized printing press uses a technology that requires exactly 1 operator, 500 sheets of paper, and 1 ink cartridge to produce a batch of 500 flyers. The company currently runs 3 presses, employing 3 operators and using 1500 sheets of paper and 3 ink cartridges per production run. If the company hires a fourth operator but does not purchase any additional paper or ink cartridges, what will be the total output of flyers in the next production run?
An insurance company observes that individuals in a low-income neighborhood are disproportionately choosing high-deductible health insurance plans. The company's analyst concludes that this is strong evidence that people in this neighborhood are, on average, lower-risk. This conclusion is sound.
Confounding Factors in Insurance Plan Selection
An insurance company is trying to understand why its deductible-based screening mechanism isn't perfectly sorting customers by risk. Match each customer profile with the most likely confounding factor that explains their choice of insurance plan.
Interpreting Insurance Choices
When an individual with a very low probability of filing a claim still chooses a high-premium, low-deductible insurance plan, their choice is likely driven by their high degree of ______, which limits the effectiveness of the deductible as a screening tool.
An insurance company offers two health plans. Plan A has a low premium and a high deductible. Plan B has a high premium and a low deductible. The company's model assumes that healthy, low-risk individuals will choose Plan A, and less healthy, high-risk individuals will choose Plan B. However, the company observes that a significant number of individuals with pre-existing health conditions (making them high-risk) are choosing Plan A. Which of the following is the most likely explanation for this observation, revealing a limitation in the company's sorting model?