Assume that a single insurance plan applies to 2,000 low-risk people and 1,000 high-risk people opting for insurance coverage.If the average claim submitted by low-risk people is $100 while that submitted by high-risk people was $1,000, the insurer would break even by setting a premium of:
A)$250.
B)$400.
C)$200.
D)$500.

Question

Quizplus · Accepted Answer

Total number of insured people = 2,000 (low risk) + 1,000 (high risk) = 3,000

Total amount of claims from low-risk people = 2,000 x $100 = $200,000
Total amount of claims from high-risk people = 1,000 x $1,000 = $1,000,000
Total amount of claims from all insured people = $1,200,000

To break even, the insurer would need to charge a premium equal to the total amount of claims divided by the number of insured people:

Premium = Total claims / Number of insured people = $1,200,000 / 3,000 = $400 per person.

Therefore, the best choice is answer B.

Assume That a Single Insurance Plan Applies to 2,000 Low-Risk