Assume that you have a population of 5,000 individuals, each of whom have a 15% chance of becoming ill in any given year. If an individual becomes ill, they will make on average 4 visits to the doctor and each will consume $100 in medications. Doctor visits cost $100 each. If a person does not become ill, they use on average $25 in preventive health services such as flu shots.

A). What are the total expected medical costs for the group?

B). Chuckie is a member of this group. What is Chuckie's expected loss (medical expense)?

C). Flo the insurance lady wants to sell health insurance to this group. If Flo calculates her administrative and profit costs as 15% of medical expenses paid, what is Flo's revenue requirement. How much will Flo charge each member for the premium?

D). If Chuckie's certainty equivalent (the amount he is willing to pay to avoid risk) is $10, would he be willing to buy Flo's policy? Why? Make sure to show your work.

Answer rating: 100% (QA)

A There is 15 chance that an individual will become ill Expected cost whe... View the full answer