Suppose your company is considering three health insurance policies. The first policy requires no tests and covers
a. Suppose that the incidence of HIV in the population is 0.005. Calculate the annual premium of the first policy.
b. If you don’t have insurance that covers HIV-related illnesses, the probability of getting HIV is 1%. If you have insurance that covers HIV-related illness, suppose that the probability of getting HIV is 2%. Calculate the premium of the second policy. Show your calculations.
c. In Question 20-3b, suppose the insurance company wants to encourage low-risk behavior by individuals who have insurance. On average, it “costs” individuals $100 to engage in low-risk behavior. Assume that if people get HIV, they pay the deductible; and if they do not get HIV, they do not pay the deductible. How high must the deductible be to encourage low-risk behavior?
d. Calculate the premium of the third policy. Show your calculations.
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