Suppose There Are Two Types of People in an Insurance

question 7

Essay

Suppose there are two types of people in an insurance market: high and low risks.The high-risk person is sick 10% of the time and the low-risk person is sick 5% of the time.The probability that any individual is high risk is 40%.Upon getting sick,an individual loses $10,000 in medical expenses.What are the actuarially fair premiums for the types?

---

Definitions:

Moral Hazard

The risk that a party insulated from risk may behave differently than if they were fully exposed to the risk.

Underpricing

Underpricing refers to setting the initial sales price of a new product or service below market value, often used to attract customers quickly.

Standby Basis

A term referring to a state of readiness without being actively engaged in a task, often used in reference to equipment or services available on-demand.