If Insurance Companies Are Required to Offer Coverage to All

question 11

Multiple Choice

If insurance companies are required to offer coverage to all interested people, it is said that premiums for each person will be increased. Assume that the insurance market is perfectly competitive. What is the major reason for raising the premium?

• A) The insurance companies take advantage of the increased demand and collude.
• B) Medical services are more expensive because of increased demand.
• C) Less healthy people join the pool of insured and hence increase the risk and the premium.
• D) None of the statements is correct.

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Definitions:

NPV

Net Present Value; a method used in capital budgeting to assess the profitability of an investment or project, calculated by discounting future cash flows to their present value and subtracting the initial investment.

IRR

The Internal Rate of Return, a financial metric used to evaluate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows equal to zero.

NPV Profiles

Graphs that show the relationship between a project's NPV and various discount rates, used to analyze the sensitivity of a project's value to changes in the cost of capital.

Crossover Rate

The rate at which the net present values of two projects are equal, often used in capital budgeting to compare projects.