OG 12 - Insurance policy

Expert replies

maihan: Newbie | Next Rank: 10 Posts; Posts: 7; Joined: Sun Oct 18, 2009 10:34 pm

by maihan » Thu Apr 22, 2010 7:07 pm

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

OA: A. Explain, pls.

Source: Beat The GMAT — Critical Reasoning | Thu Apr 22, 2010 7:07 pm

pradeepkaushal9518: Legendary Member; Posts: 1309; Joined: Wed Mar 17, 2010 11:41 pmFollowed by: 5 members; Thanked: 33 times

by pradeepkaushal9518 » Thu Apr 22, 2010 8:29 pm

imo A is the answer

A. as middle aged people will not have any serious diseases so that they will not put any claim so the company may not be in loss.
B children will never take health policies so incorrect
C. greater no of service means increase in cost so increase in loss
D. they may be rejected due to non payment of premium or fake claims then again loss.
E. wealthy people does not mean they are healthy they may have more serious dieses like high bp , heart problems due to obesity so high risk and greater loss.

pradeep kaushal

tpr-becky: GMAT Instructor; Posts: 509; Joined: Wed Apr 21, 2010 1:08 pmFollowed by: 85 members; Location: Irvine, CA; Thanked: 199 times; GMAT Score:750

by tpr-becky » Thu Apr 22, 2010 9:06 pm

I agree with A because you need to either increase costs or reduce claims. because the paragraph says that costs must be low you need to reduce claims and A says that the middle class people are unlikely to make claims (it has to actually say this).

Becky
Master GMAT Instructor
The Princeton Review
Irvine, CA

pradeepkaushal9518: Legendary Member; Posts: 1309; Joined: Wed Mar 17, 2010 11:41 pmFollowed by: 5 members; Thanked: 33 times

by pradeepkaushal9518 » Thu Apr 22, 2010 10:17 pm

thanks tpr becky again

maihan: Newbie | Next Rank: 10 Posts; Posts: 7; Joined: Sun Oct 18, 2009 10:34 pm

by maihan » Fri Apr 23, 2010 8:48 am

In the argument, it is stated that the new service targets elderly people, who suffer from diseases that afflict the elderly, while in answer A, the solution is that the company should attract middle-aged people, a different age group -> a different target audience. I find the idea conflicting. How you think?

pradeepkaushal9518: Legendary Member; Posts: 1309; Joined: Wed Mar 17, 2010 11:41 pmFollowed by: 5 members; Thanked: 33 times

by pradeepkaushal9518 » Fri Apr 23, 2010 9:02 am

actually the company was planing to launch new policies but they found that if they sell it yo elderly people then they will face losses as the premium they want to keep low but claims will be huge if it is given to elder people
middle aged people, childrens, welathy peoples or people who are discarded by other insurance company.

so out of above only if given to middle aged people the company will face less loss...

frank1: Legendary Member; Posts: 537; Joined: Fri Jan 22, 2010 10:06 pmFollowed by: 1 member; Thanked: 14 times

by frank1 » Fri Apr 23, 2010 10:19 am

For the sake of the answer i was confused between A and E
i took A after 2:24 as i thought
Being in businessman shoe,attracting middle aged employee means they will pay more monthly insurance policy money to company and no immediate claims in immediate future..

I said "for the sake of the answer" as if we really adopt this kind of policy it will be kind of canibalization effecting other policies of the organization (it will be like converting one package to other making it similar to other)

well ,only answer counts here...lol

jube: Master | Next Rank: 500 Posts; Posts: 186; Joined: Fri May 28, 2010 1:05 am; Thanked: 11 times

by jube » Mon Jun 21, 2010 10:42 pm

I was looking at this question & had a doubt: even if the target group is middle-aged right now, won't they still get to claim the money in a few yrs time once they're elderly and one assumes, inflicted with the diseases which elderly are afflicted with? I guess my point is won't the company have to shell out money EVENTUALLY? Isn't attracting middle-age customers just a postpone-ment of the problem which WILL lead to eventual losses for the company and hence the wrong answer?

TIA for any clarification!

pradeepkaushal9518: Legendary Member; Posts: 1309; Joined: Wed Mar 17, 2010 11:41 pmFollowed by: 5 members; Thanked: 33 times

by pradeepkaushal9518 » Mon Jun 21, 2010 11:15 pm

jube

suppose the age of a middle aged person is 35. and the company gave him a policy for 10 years

so in the period of 35 to 45 generally people dont have any serious problems hence the % of people making claim will not be high it may be 20 to 30 percent

but if the policy is given to person aged 50 for 10 years then the major diseases will occur in this age only hence percentage of making claim will be more 60 to 80 percent.

hence in the earlier case the loss to company is less hence they will target more to middle aged people

bvn: Senior | Next Rank: 100 Posts; Posts: 63; Joined: Sun Mar 08, 2009 7:38 am

by bvn » Thu Jul 01, 2010 4:54 am

I am confused about the OA too!

The sevices required by elderly people. So the new policy should be designed for elderly people.

Could any experts explain this.

Thank you

tanviet: Legendary Member; Posts: 1404; Joined: Tue May 20, 2008 6:55 pmFollowed by: 2 members; Thanked: 18 times

by tanviet » Fri Jul 02, 2010 5:45 am

I do not agree with OA too. The elderly persons are different from middle aged persons. A is out of scope.

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