A. If a population has two kinds, high and low. risk. Let the expected annual health care costs for the high risk be $5,000, and for the low risk, half that. If there are twice as many low risk as high-risk individuals, and if the one insurer’s administrative load is 20%, what would the premium be if everyone will buy health insurance?

B. Now if a new insurer (B) enter this marketplace and be allowed to exclude the high risk due to pre-existing condition exclusions while the other incumbent insurer (A) is forced to still charge the same rate. Assuming loads remain at 20% in long run equilibrium, what would the premiums be in each market, (low risk, high risk)?

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Lets break down each part of the question A To calculate the premium when everyone buys health insur... View the full answer