Conclusion: Legal costs do not cause an increase in insurance prices.gmatusa2010 wrote:Editorial: The insurance industry claims that legal costs associate ith frivolous lawsuits and outrageous awards are responsible for skyrocketing price of insurance, but this explaination is wrong. Although it is true that legal costs incurred by insurance companies have increased at an accelerating rate over the past several years, these costs have increased at only a fraction of the rate at which the prices that insurance companies charge have increased.
Which of the following, if true, lends the greatest support to the editorial argument?
A) Prices charged by insurance companies do not take into accounts likely future increases in the legal costs incurred by thhose companies
B) Because insurers are publicly traded companies that must meet profit goals, many increases in cost are folloed by an increase in prices that exceeds the amount of the cost increase by a fixed amount
The rest of the choices are irrelevant.
I got this wrong and I don't like the explanaition provider for the OA. To me this is a toss up. Inputs??
My analysis:
Conclusion: legal costs + outrageous awards = high insurance price IS wrong. Answer should prove this or stregthen why legal costs + outrageous awards does not contribute to high insurance.
Prediction: The correct answer will show that legal costs are not connected to price increases.
A: Correct. This answer says that the insurance companies do not consider future legal costs when they determine what prices to charge. It breaks the link between legal costs and price increases.
B. This answer says only that the insurance companies sometimes raise prices beyond their increases in costs. It does not indicate where those costs are coming from. It is still possible that legal costs are causing the insurance companies to raise prices (even if the companies are raising prices more than is necessary to cover their costs.) Also, be skeptical of answer choices that use the word many. We have no way to determine the number of companies represented by the word many.
Hope this helps!
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Followed here and elsewhere by over 1900 test-takers.
I have worked with students based in the US, Australia, Taiwan, China, Tajikistan, Kuwait, Saudi Arabia -- a long list of countries.
My students have been admitted to HBS, CBS, Tuck, Yale, Stern, Fuqua -- a long list of top programs.
As a tutor, I don't simply teach you how I would approach problems.
I unlock the best way for YOU to solve problems.
For more information, please email me (Mitch Hunt) at [email protected].
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