Question
Insurance companies commonly use blood tests to identify HIV (if permitted by law). However, since blood tests are not free, insurers may only use blood
Insurance companies commonly use blood tests to identify HIV (if permitted by law). However, since blood tests are not free, insurers may only use blood tests if the expected costs of misclassification exceed the cost of the test. Suppose that the cost of the blood test is $100 and the probability of death for HIV-infected males is 20 times the probability listed in the attached mortality table for males. (1) What are the expected claim costs for a 30-year-old male applying for $100,000 of one-year term insurance if he is HIV negative? (2) What are the expected claim costs for a 30-year-old male applying for $100,000 of one-year term insurance if he is HIV positive? (3) Suppose that 1,000 30-year-old males apply for insurance. The insurer knows that 2 percent of them are HIV positive but needs the blood test to identify those specific applicants. What is the expected cost per policyholder without classification?What is the expected cost per policyholder with classification given that insurers can deny coverage to those who are HIV positive once being identified.Should the insurer give all applicants a blood test? (10 points)
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