Insurance policies

Question

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

Patrick_GMATFix · Answer

The right answer will provide a solution to the problem; it should provide a way to offer the elderly coverage while keeping premium payments low. The answer is A. I go through the question in detail in the full solution below (taken from the GMATFix App).

-Patrick

Rich.C@EMPOWERgmat.com · Answer

Hi BlueDragon2010,

This CR question actually gives you a specific hint in the question stem itself: We're asked to find an answer that would MINIMIZE Company X's losses on the policies. With that goal in mind, we need to understand the logic that is presented in the prompt, THEN find a way to minimize the losses that are described.

The Facts:
-Company X is considering issuing a new policy that will cover services for diseases that affect elderly people (and will sell these policies to elderly people).
-Premiums for this policy must be low enough to attract customers.

The Conclusion:
-Company X is concerned that the income (from the premiums) will not be enough to pay for the claims that the elderly customers would make.

The Logic:
-Since this plan requires premiums to be low enough to attract customers, the company is concerned that it will LOSE MONEY on the policies (since elderly customers will make claims that will cost the insurance company more money than the policies brought in). We're asked to find a way to MINIMIZE LOSSES, so we need an answer that will do one (or both) of the following:
1) Bring in more money
2) Minimize claims that are submitted

Answer A provides a solution that would bring in more premiums and minimize the number of claims (at least in the short term).

GMAT assassins aren't born, they're made,
Rich

Contact Rich at [email protected]

swarnav999 · Answer

Hi Rich,

I didnt get your point although you have explained it in detail. Actually, it would help if you could kindly explain the last two points that you mentioned and plug it into option A. Yhanks!

[email protected] wrote:Hi BlueDragon2010,

This CR question actually gives you a specific hint in the question stem itself: We're asked to find an answer that would MINIMIZE Company X's losses on the policies. With that goal in mind, we need to understand the logic that is presented in the prompt, THEN find a way to minimize the losses that are described.

The Facts:
-Company X is considering issuing a new policy that will cover services for diseases that affect elderly people (and will sell these policies to elderly people).
-Premiums for this policy must be low enough to attract customers.

The Conclusion:
-Company X is concerned that the income (from the premiums) will not be enough to pay for the claims that the elderly customers would make.

The Logic:
-Since this plan requires premiums to be low enough to attract customers, the company is concerned that it will LOSE MONEY on the policies (since elderly customers will make claims that will cost the insurance company more money than the policies brought in). We're asked to find a way to MINIMIZE LOSSES, so we need an answer that will do one (or both) of the following:
1) Bring in more money
2) Minimize claims that are submitted

Answer A provides a solution that would bring in more premiums and minimize the number of claims (at least in the short term).

GMAT assassins aren't born, they're made,
Rich

sameer3105 · Answer

The argument says "income from the policies would not be sufficient to pay for the claims that would be made".
Strategy: Increase income and if possible minimise claims>>Net profit increases.

Now consider a point where you can not minimize claims.You have to play on scale to increase your net profit.

Hence,(A) Attracting middle-aged customers unlikely to submit claims for benefits for many years
which serves both at one go.

girishbp2 · Answer

The main confusion is "Why would middle-aged customers buy the policy meant for the elderly?"

The Middle-aged people would want to buy this policy only as a contingency plan (for the future), Since, the argument talks about the diseases afflicting the elderly and not the middle-aged.

Now the strategy(reasoning) mentioned in answer choice A might seem a little far-fetched by GMAT standards (if one were to compare the indisputable reasoning in other GMAT CR Q's) BUT,since only ans choice A talks about increasing income (by adding a new profitable segment of customers to the existing segment(elderly segment)) without causing a major overhaul to its original strategy, only answer choice A can be correct.

Also the question states Most likely strategy, and not a absolutely workable strategy.

There are some more such type of Q's that can create confusion and the best way to tackle such Q's is by understanding which answer choice is more related to the facts of the argument and less far fetched than other choices.

kutlee · Answer

girishbp2 wrote:The main confusion is "Why would middle-aged customers buy the policy meant for the elderly?"

The Middle-aged people would want to buy this policy only as a contingency plan (for the future), Since, the argument talks about the diseases afflicting the elderly and not the middle-aged.

Now the strategy(reasoning) mentioned in answer choice A might seem a little far-fetched by GMAT standards (if one were to compare the indisputable reasoning in other GMAT CR Q's) BUT,since only ans choice A talks about increasing income (by adding a new profitable segment of customers to the existing segment(elderly segment)) without causing a major overhaul to its original strategy, only answer choice A can be correct.

Also the question states Most likely strategy, and not a absolutely workable strategy.

There are some more such type of Q's that can create confusion and the best way to tackle such Q's is by understanding which answer choice is more related to the facts of the argument and less far fetched than other choices.

I think the option never said that middle aged customers would be enrolled to same policy (That is meant for elderly). It is quite possible that company has more profit making policies for middle aged people and make more revenue.

src_saurav · Answer

Hi,Please explain why E is not an option.E says that only people able to pay for medical services should be sold the policies.This way their losses can be minimized as they will accept the low premiums and services it will provide.The A option says that middle aged people who will not submit claims for long should be targeted.I say what about the situation when they will actually claim for benefits ,will it be more or less?....Choice E seemed best to me.

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