Suppose a comprehensive 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 $200 while that submitted by high-risk people is $2,000, what would be the net benefit accrued by a high-risk person paying the break even premium charged by the insurance company?
A)-$300
B)$1,800
C)$1,200
D)-$400

Question

Quizplus · Accepted Answer

The break-even premium is calculated by dividing the total claims by the total number of people. Total claims = (2,000 * $200) + (1,000 * $2,000) = $400,000 + $2,000,000 = $2,400,000. Total people = 2,000 + 1,000 = 3,000. Break-even premium = $2,400,000 / 3,000 = $800. A high-risk person's net benefit = Average claim - Break-even premium = $2,000 - $800 = $1,200.

Suppose a Comprehensive Plan Applies to 2,000 Low-Risk People and 1,000