OG 12 - CR # 55

Fractal wrote:Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from disease 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?

Correct answer:
Attracting middle-aged customers unlikely to submit claims for benefits for many years.

How can this answer be the correct answer choice? Isn't it totally illogical that middle-aged persons would buy a policy to cover services required by elderly people?

Thx,
fractal

but wouldn't it be a neat trick if they managed to pull it off?

yes, it would be...

Geva@MasterGMAT wrote:

Fractal wrote:Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from disease 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?

Correct answer:
Attracting middle-aged customers unlikely to submit claims for benefits for many years.

How can this answer be the correct answer choice? Isn't it totally illogical that middle-aged persons would buy a policy to cover services required by elderly people?

Thx,
fractal

but wouldn't it be a neat trick if they managed to pull it off?

the answer is not illogical. If you manage to catch people with the insurance claim during their middle age when they still have their health, and have them pay your annual premiums for the entire length of time until they reach old age, and only then you'll have to start covering their policy and taking care of their failing health, that creates a way to make sure that even if you do end up paying for expensive care of the elderly, at least that elder has paid for it with years of premium from middle age to this point. Thus, if X does manage to hook people when they're relatively young, that strategy will minimize their losses. Hell, with any kind of luck the client pays your premiums for 20 years from middle age to old age, then promptly keels over from a heart attack, exempting you from paying back a single dime.

Fractal wrote:yes, it would be...

Our job is not to worry about whether this makes economic sense for the clients. Or to tell the inurance company how to run their business. How they hook people in is their own problem. Our job is limited to pinpointing the answer to the question "which of these would make sure that their losses are minimized". The answer choice you presented will do just that.