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 30,000 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 individual's 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 person's , determines the amount he or she pays. Consider the following example: An Insurance policy in Action Brian is a 21-year-old college student who recently fell off a roof at a party and had to be rushed by ambulance to the emergency room at a nearby hospital. Although an MRI revealed that he suffered no internal injuries, and he was released only hours later with mild pain medication, his medical bill for the hospitalization and tests totaled $4,948. Brian is covered under his parents' insurance policy, which has a $300 hospital stay deductible and a coinsurance rate of 20%. His parents can therefore expect a reimbursement from the insurance company of $ Complete each statement that follows with the appropriate insurance term. Brian often engages in dangerous behavior because he knows he is covered by his parents' insurance policy. This is an example of It is easier for the insurance company to predict the risk associated with an entire town than to predict the risks of a given individual. This reflects the . Because Brian is young and has no history of medical conditions, he is a part of the class of insured. 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 30,000 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 individual's 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 person's , determines the amount he or she pays. Consider the following example: An Insurance policy in Action Brian is a 21-year-old college student who recently fell off a roof at a party and had to be rushed by ambulance to the emergency room at a nearby hospital. Although an MRI revealed that he suffered no internal injuries, and he was released only hours later with mild pain medication, his medical bill for the hospitalization and tests totaled $4,948. Brian is covered under his parents' insurance policy, which has a $300 hospital stay deductible and a coinsurance rate of 20%. His parents can therefore expect a reimbursement from the insurance company of $ Complete each statement that follows with the appropriate insurance term. Brian often engages in dangerous behavior because he knows he is covered by his parents' insurance policy. This is an example of It is easier for the insurance company to predict the risk associated with an entire town than to predict the risks of a given individual. This reflects the . Because Brian is young and has no history of medical conditions, he is a part of the class of insured
