Assume a high-risk person;has a 0.50 probability of a $500 medical expense and a low-risk person has a 0.10 probability of a $500 medical expense.Both types of people are risk neutral.What is the community rating premium for a neighborhood containing exactly half of each type of person?

Question

Quizplus · Accepted Answer

Because both people are risk neutral,they are only willing to pay their expected cost.The community rating would be $150 if both agents were buying,but the low-risk person is not willing to purchase insurance at this price.Therefore,the only person buying insurance is the high-risk person and their expected cost is (0.5)($500)= $250.

Assume a High-Risk Person;has a 0