Encourage low-risk behavior

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Reference no: EM138306

Q. Assume your company is considering three health insurance policies. The first policy requires to tests and covers all preexisting illnesses. The second policy requires that all covered employees test negative for the HIV virus. The 3rd policy doesn't cover HIV- or AIDS- related illnesses. All insurance policies are priced at their actuarially "fair" price. All individuals are somewhat risk averse. An individual with the HIV virus needs on average, $100,000 value of medical care every year. An individual without the virus requires, on average, $500 worth of medical care each year.

a. Assume that the occurrence of HIV in the population is 0.005. Analyze the amount premium of the first policy.

b. If you don't have insurance that covers HIV-related illnesses, the probability of getting HIV is 1%. If you have insurance which comprise HIV-related illness, suppose that the probability of getting HIV is 2%. Compute the quality of the second policy. Demonstrate your calculations.

c. Suppose the insurance company wants to encourage low-risk behavior by individuals who have insurance. On average, it "expenses" individuals $100 to engage in low-risk behavior. Suppose if people get HIV then they pay the deductible; and if they do not get HIV, they do not pay the deductible. Explain how high must the deductible be to encourage low-risk behavior?

d. Compute the premium of the 3rd policy. Demonstrate your calculations.

Reference no: EM138306

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