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confusing question

by bupbebeo » Thu May 13, 2010 4:13 am
An insurance company has decided to offer "college insurance." This is a plan that guarantees that a child who is the subject of the insurance will be provided with $30,000 a year for four years of college education upon turning eighteen. Such plans are great for attracting new business to the company, but the insurance company executives worry that the company will lose money, as the premiums may not be enough to pay for the education claims.

Which of the following plans will best help to prevent the insurance company from losing money on the college insurance policies?



A, Requiring that the policies be purchased only for children under the age of two.

B, Insuring children whose families are able to pay for college on their own.


C, Offering an optional five thousand dollar benefit to be used for educational travel abroad.


D, Insuring only one child per family.



E, Offering premium discounts for multiple-policy holders.
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by paes » Thu May 13, 2010 5:33 am
IMO A

A is saying that the premium will be from the age-2 to age-18. So the company will get the good amount of money.

B) doesn't matter
C) will cost more
D) doesn't matter
E) Out of scope
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by Domnu » Thu May 13, 2010 5:57 am
IMO, [spoiler]E.

A - when the students turn 18, the $30000 will be cashed... this doesn't save money for the firm, but just postpones the loss
B - this does nothing... the firm still loses money.
C - this causes the firm to lose more money
D - this helps lessen the loss, but doesn't prevent the loss
E - this is correct. Multiple-policy holders are already providing money to the company, so offering benefits allows the $30,000 a year to be present.[/spoiler]
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by 2011mbaspirant » Thu May 13, 2010 10:17 pm
What is the OA?
I am confused between B and E.
Option B sounds good as insuring those who can pay for their kid's education on their own is a safe option just incase if the company runs out of money for education claims.
Option E also sounds good as offering discount for multiple policy holders will bring in more money. But then ooffering discount may also not bring enough enough money to pay for the education claims.

Experts???
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by mohit11 » Fri May 14, 2010 3:00 am
bupbebeo wrote:An insurance company has decided to offer "college insurance." This is a plan that guarantees that a child who is the subject of the insurance will be provided with $30,000 a year for four years of college education upon turning eighteen. Such plans are great for attracting new business to the company, but the insurance company executives worry that the company will lose money, as the premiums may not be enough to pay for the education claims.

Which of the following plans will best help to prevent the insurance company from losing money on the college insurance policies?

Company will lose money as the premiums may not be enough. So the correct option will find a way that the company gets more premiums. Lets review the answer choices

A, Requiring that the policies be purchased only for children under the age of two. - By doing this, people will pay premiums for a longer period (i.e till the child goes to college) therefore company makes more money.

B, Insuring children whose families are able to pay for college on their own. - Even if they can pay for college on their own, why would they not still use the plan. Eliminate


C, Offering an optional five thousand dollar benefit to be used for educational travel abroad. - So? Does not affect the argument. Out of Scope


D, Insuring only one child per family. - So? That one child will still claim the money.


E, Offering premium discounts for multiple-policy holders. - We are trying to save money not give discounts. There is no indication in the argument that by giving discounts to multiple policy holders, the company will make more money. Eliminate
Answer A
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by gmatmachoman » Fri May 14, 2010 7:51 am
I will select F!! I see no choices very much suitable!
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by Alex_Knewton » Fri May 14, 2010 9:09 am
This is definitely a confusing question, and in my opinion, it is confusing for two very specific reasons.
  • 1) The situation makes no real-life sense. "Insurance" implies that people are paying premiums in case a certain contingency occurs. But this "college insurance" has no attached contingency; it merely says that people get $120,000 for their child's college education at a certain, predictable, fixed point in time. Period. In this situation, the only way this company could make any money is by ensuring that they receive more that $120,000 per insurance policy, or by ensuring that some families buy, but do not use their insurance, for some reason.

    2) Given the above situation, the key issue is the premiums. If a family pays $5,000/year for this insurance, say, then it is definitely a bad idea for the company, because a family would have to pay for 24 years for the company to break even, and this is virtually impossible based on the premises of the argument. On the other hand, if the premiums were $20,000/year, the company would make a profit if people paid for more than 6 years of insurance per child. However, we know nothing about the actual value of these premiums.
This question was almost certainly copied from a question that was about insurance in a more meaningful way (who wouldn't want "insurance" like this?!). I think that the question writers probably intended choice A to be correct, for the reasons Mohit described. But B is also in the running.

C and D are out; they are classic GMAT traps which change the subject. Choice E doesn't make sense, either- the ONLY way the company could make money is with large premiums (or long time frames, or both), so this choice is the opposite of a correct answer.

Choice B, however, almost could be correct. As Mohit says, there is nothing in the argument that states that a wealthy family could not use this "insurance." So as it stands, B is incorrect. However, I get the sense that if this question was a little tighter, it would explain that families only get the money if they need it, and if that were true, choice B would be correct.

In any case, though, choice A is the best of a bad bunch. It is true that, all other things being equal, if families pay a premium every year, then forcing families to pay for more years of premiums would help cut losses.

Hope this helps!
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by gtvisa2002 » Fri May 14, 2010 7:27 pm
Yes.... Alex is right.
This is designed based on another question
https://www.beatthegmat.com/og-12-insura ... 56500.html

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by bupbebeo » Fri May 14, 2010 11:06 pm
Alex_Knewton wrote:This is definitely a confusing question, and in my opinion, it is confusing for two very specific reasons.
  • 1) The situation makes no real-life sense. "Insurance" implies that people are paying premiums in case a certain contingency occurs. But this "college insurance" has no attached contingency; it merely says that people get $120,000 for their child's college education at a certain, predictable, fixed point in time. Period. In this situation, the only way this company could make any money is by ensuring that they receive more that $120,000 per insurance policy, or by ensuring that some families buy, but do not use their insurance, for some reason.

    2) Given the above situation, the key issue is the premiums. If a family pays $5,000/year for this insurance, say, then it is definitely a bad idea for the company, because a family would have to pay for 24 years for the company to break even, and this is virtually impossible based on the premises of the argument. On the other hand, if the premiums were $20,000/year, the company would make a profit if people paid for more than 6 years of insurance per child. However, we know nothing about the actual value of these premiums.
This question was almost certainly copied from a question that was about insurance in a more meaningful way (who wouldn't want "insurance" like this?!). I think that the question writers probably intended choice A to be correct, for the reasons Mohit described. But B is also in the running.

C and D are out; they are classic GMAT traps which change the subject. Choice E doesn't make sense, either- the ONLY way the company could make money is with large premiums (or long time frames, or both), so this choice is the opposite of a correct answer.

Choice B, however, almost could be correct. As Mohit says, there is nothing in the argument that states that a wealthy family could not use this "insurance." So as it stands, B is incorrect. However, I get the sense that if this question was a little tighter, it would explain that families only get the money if they need it, and if that were true, choice B would be correct.

In any case, though, choice A is the best of a bad bunch. It is true that, all other things being equal, if families pay a premium every year, then forcing families to pay for more years of premiums would help cut losses.

Hope this helps!
Hey Alex, why you say " But this "college insurance" has no attached contingency; in the Gmat, we have right to accept something which is obviously true. the fact is that people often buy insurance because they believe some contingency may happen to them in the future. Therefore, even the argument does not mention any contingency, we cannot say as you did that this college insurance has no attached contingency. if the college insurance has no attached contingency. people buy insurance for what.
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by Alex_Knewton » Sun May 16, 2010 6:02 am
bupbebeo:

Hey Alex, why you say " But this "college insurance" has no attached contingency; in the Gmat, we have right to accept something which is obviously true. the fact is that people often buy insurance because they believe some contingency may happen to them in the future. Therefore, even the argument does not mention any contingency, we cannot say as you did that this college insurance has no attached contingency. if the college insurance has no attached contingency. people buy insurance for what.

Alex:

You're absolutely right, bupbebeo; when a GMAT CR question gives you factual information, you must accept that as evidence that must be true. We can't assume completely that there is no contingency; but neither can we assume that we know what the contingency is! That leaves us in a funny position.

To be clear, when I'm referring to "contingency" here, I'm referring to REAL-life insurance. If a company gives you $120,000 to put your child through college when you've given them less, that would be a gift; if you are expected to pay it back, it becomes a "loan." But usually an "insurance" company only gives money if something bad happens: a "contingency." (If you get life insurance, you have to die to get any money, for example). Why it matters in this case is that the "premiums" may or may not be more expensive than the payout; because the situation is unrealistic, its hard to know how to read it- is this a company that is philanthropic and like to pay for kids, or one that is sneaky and gets tons of money in premiums and doesn't pay for much?

So, you're right, there SHOULD be some "implied" contingency in this argument. It should say "If a family pays all their premiums, the company will pay for the child's education IN THE EVENT THAT THEY CANNOT PAY FOR IT THEMSELVES." However, the argument doesn't actually say anything like this, so we, as test-takers, are left confused up in the air, not sure how much we can safely infer. Answer choice B, which would rely on that contingency, may or may not be correct. Only choice A is safe.
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