1. Understanding how insurance works Insurance policies are a common form of risk reduction or risk transfer in which a third party assumes some or all of the risks posed by certain dangers. Why would the company be willing to assume these risks? Consider a simplified example in which all 50,000 residents in a particular town pay $100 a month to the insurance company SecureSure for medical insurance coverage. The insurance company cannot predict whether a given resident will need hospitalization or how much any individuals care will cost. Suppose, however, it has data that on average, 10% of the citizens require care each month, costing an average of $1,200 each. The expected average cost of monthly care will be $ per person. If the insurance company sets the monthly equal to this amount, it would break even (on average). In reality, the rates that an individual pays each month vary based on a process known as , in which the insureds are divided into four insurance classes. The class, which is based on an insured persons , determines the amount he or she pays. Consider the following example: An Insurance Policy in Action Felix is a 65-year-old man who recently experienced what he thought were stroke-like symptoms and went to the emergency room at a nearby hospital. Although it turned out to be a severe case of heartburn, not a stroke, his medical bill for the hospitalization and tests totaled $4,805. Felix has an insurance policy with a $500 hospital stay deductible and a coinsurance rate of 20%. He can therefore expect a reimbursement from the insurance company of $ .(Note: Round your answer to the nearest dollar.) Complete each statement that follows with the appropriate insurance term. Felixs age and history of heart attacks increase his chances of suffering an insurable loss. This is an example of . Felix cannot receive more than $4,805 in reimbursement from his insurance company. This reflects the . Because Felix is older and has a history of heart attacks, he is a part of the class of insured