Anni yh wrote:Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly. Premiums for the policy must be low enough to attract customers. Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.

Which of the following strategies would be most likely to minimize Company X's losses on the policies?

A.Attracting middle-aged customers unlikely to submit claims for benefits for many years
B.Insuring only those individuals who did not suffer any serious diseases as children
C.Including a greater number of services in the policy than are included in other policies of lower cost
D.Insuring only those individuals who were rejected by other companies for similar policies
E.Insuring only those individuals who are wealthy enough to pay for the medical services

the correct answer is A

But I have doubts : although now the company has attracted healthier customers---so in a short future time the company can decrease its loss, in a future, say 30 years later when those middle-aged customers become old, the company will begin to loose a great deal of money as the result of the increase of the claims of those newly aged people. So in a long term, the strategy in A won´t minimize its loss.

Can anyone tells me why my thinking is wrong?

Thank you so much!!

Hi Anni Yh,

Let's go over the stimulus before we talk about the options:

Premise 1: New policy to cover elderly people for diseases afflicting the elderly
Premise 2: Since these people will mostly be in the retirement phase, the premium should be low
Conclusion: Will the income from the policies be sufficient to pay for the claims made?

How does the Insurance industry work? The main way in which the insurance industry benefits is the premium that it collects from customers who do not make a claim in a particular year. These premiums are re-invested in the market and also interest is earned for years. So for an insurance industry the most profitable customers are those who pay for years and then claim after 10-15 years. Even then the number of customers who would end up claiming will not be more than 4-5% in a year. By then, they would have anyway made enough from the premiums deposited by the said customer to be able to pay for his claim.

In short, the insurance industry works on probability.

Now, looking at the options, clearly the answer will be A. For the other answers, the reasons are as below:

A. Correct answer as per explanation above
B. Cannot be pre-determined and while the premium can be made higher for such individuals, no guarantee of the number of claim-free premium years. INCORRECT
C. Weakens the possibility of better margins as any service would be a cost. INCORRECT
D. Weakens the possibility of better margins as those individuals would be at an even higher probability to need a claim soon. INCORRECT
E. Even if the individual is wealthy enough to pay for the service, the insurance company would be obligated to pay for it when the individual makes his/her claim INCORRECT

Thus, the answer is A.

MBA Challengers wrote:

Anni yh wrote:Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly. Premiums for the policy must be low enough to attract customers. Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.

Which of the following strategies would be most likely to minimize Company X's losses on the policies?

A.Attracting middle-aged customers unlikely to submit claims for benefits for many years
B.Insuring only those individuals who did not suffer any serious diseases as children
C.Including a greater number of services in the policy than are included in other policies of lower cost
D.Insuring only those individuals who were rejected by other companies for similar policies
E.Insuring only those individuals who are wealthy enough to pay for the medical services

the correct answer is A

But I have doubts : although now the company has attracted healthier customers---so in a short future time the company can decrease its loss, in a future, say 30 years later when those middle-aged customers become old, the company will begin to loose a great deal of money as the result of the increase of the claims of those newly aged people. So in a long term, the strategy in A won´t minimize its loss.

Can anyone tells me why my thinking is wrong?

Thank you so much!!

Hi Anni Yh,

Let's go over the stimulus before we talk about the options:

Premise 1: New policy to cover elderly people for diseases afflicting the elderly
Premise 2: Since these people will mostly be in the retirement phase, the premium should be low
Conclusion: Will the income from the policies be sufficient to pay for the claims made?

How does the Insurance industry work? The main way in which the insurance industry benefits is the premium that it collects from customers who do not make a claim in a particular year. These premiums are re-invested in the market and also interest is earned for years. So for an insurance industry the most profitable customers are those who pay for years and then claim after 10-15 years. Even then the number of customers who would end up claiming will not be more than 4-5% in a year. By then, they would have anyway made enough from the premiums deposited by the said customer to be able to pay for his claim.

In short, the insurance industry works on probability.

Now, looking at the options, clearly the answer will be A. For the other answers, the reasons are as below:

A. Correct answer as per explanation above
B. Cannot be pre-determined and while the premium can be made higher for such individuals, no guarantee of the number of claim-free premium years. INCORRECT
C. Weakens the possibility of better margins as any service would be a cost. INCORRECT
D. Weakens the possibility of better margins as those individuals would be at an even higher probability to need a claim soon. INCORRECT
E. Even if the individual is wealthy enough to pay for the service, the insurance company would be obligated to pay for it when the individual makes his/her claim INCORRECT

Thus, the answer is A.

Thank You so much!! Your explanation is very clear and I finally understand now! thank you!!