Assume that insurance company ABC provides a health insurance contract with a premium value P= USD 20,000 in 2019. Expected customer health care costs Xi are distributed independently and uniformly in the population as following: Xi ~ Uniform [USD 0, USD 40,000] Population is equally distributed between robust (good health people) and frail people (low health people). Robust population do not demand this insurance contract as they expect to have their health care costs lower than the premium amount P= USD 20,000. On the other hand, Frail population decide to purchase this insurance deal as they expect their health care costs greater than the premium amount P= USD 20,000.

• Please define and explain the market situation that insurance company ABC is exposed to in 2019. Please draw a figure with a uniform distribution and clearly show the regions defining market demand for insurance. Summarize insurance company ABC’s financial statement and find expected profit or loss per customer on average. [Hint: Find receivables from customers and payables to customers for health care].

• You are a consultant and you suggest insurance company ABC to raise its insurance premiums to P= USD 30,000 for 2020. Does this new premium save the insurance company’s cash flow when each customer’s health care costs is USD 30,000 to an insurance company? Please draw a figure with a uniform distribution and clearly show the regions defining market demand for insurance with the new premium. Summarize insurance company ABC’s financial statement and find expected profit or loss per customer on average. [Hint: Find receivables from customers and payables to customers for health care]. Please define and explain the market situation that insurance company ABC is exposed to in 2020 with the new premium.

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The insurance company ABC is exposed to a market situation in 2019 where the expected customer health care costs are distributed evenly between robust ... View the full answer