Q. Insurance Company X is considering issuing a new policy

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Q. Insurance Company X is considering issuing a new policy [#permalink]

08 Nov 2012, 02:54

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Q. Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly. Premiums for the policy must be low enough to attract customers. Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.
Which of the following strategies would be most likely to minimize Company X's losses on the policies?
(A) Attracting middle-aged customers unlikely to submit claims for benefits for many years
(8) Insuring only those individuals who did not suffer any serious diseases as children
(C) Including a greater number of services in the policy than are included in other policies of lower cost
(D) Insuring only those individuals who were rejected by other companies for similar policies
(E) Insuring only those individuals who are wealthy enough to pay for the medical services

As it says diseases which afflict elderly, A & B seemed out. C & D increases the losses for company X. So only ans left is E. Though E is weird its the only choice that remains

I am confused with the official ans. Can anyone throw some light?

[Reveal] Spoiler: OA

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Re: Insurance Company X is considering issuing a new policy..... [#permalink]

08 Nov 2012, 03:16

summer101 wrote:

Q. Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly. Premiums for the policy must be low enough to attract customers. Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.
Which of the following strategies would be most likely to minimize Company X's losses on the policies?
(A) Attracting middle-aged customers unlikely to submit claims for benefits for many years
(8) Insuring only those individuals who did not suffer any serious diseases as children
(C) Including a greater number of services in the policy than are included in other policies of lower cost
(D) Insuring only those individuals who were rejected by other companies for similar policies
(E) Insuring only those individuals who are wealthy enough to pay for the medical services

As it says diseases which afflict elderly, A & B seemed out. C & D increases the losses for company X. So only ans left is E. Though E is weird its the only choice that remains
I am confused with the official ans. Can anyone throw some light?

The case given in the argument is clear - "New policy for elderly citizens for the deseases that affect elderly!"
Now if company sells the policies only to elderly, chances are that everyone (or majority) is going to claim. practical knowledge tells us that money that we claim from insurance is much higher than premium we pay. So insurance company will lose money in such case.

What can be done to avoid it? Either reduce the costs (claim) or increase the revenue. The only way to do this is get people who have least probability of claims. They will pay but not claim! Ans A provides this solution.

Hence ans A it is.
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Re: Insurance Company X is considering issuing a new policy..... [#permalink]

08 Nov 2012, 07:13

Hi,

Let me try and help by going through one by one...

Q. Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly. Premiums for the policy must be low enough to attract customers. Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.
So overall sense is: Company X is considering a new policy, but is worried that the payouts would be more than the possible premiums

Which of the following strategies would be most likely to minimize Company X's losses on the policies?
So which answer would help them lower their losses. This could be higher premiums or lower payouts. Let us see,,,,

(A) Attracting middle-aged customers unlikely to submit claims for benefits for many yearsThis works. If people can pay in for several years before claiming, then they are more likely to have paid enough to cover any possible claims
(8) Insuring only those individuals who did not suffer any serious diseases as childrenNot relevant. This is a policy for diseases relating to the elderly, their childhood history is not relevant
(C) Including a greater number of services in the policy than are included in other policies of lower costNope. This would potentially increase the number/size of claims.
(D) Insuring only those individuals who were rejected by other companies for similar policies Nope. This would mean only higher risk patients, so more claims
(E) Insuring only those individuals who are wealthy enough to pay for the medical services Nope. Not relevant. Who cares if they COULD pay for the services, the insurance means they would not have to
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Re: Insurance Company X is considering issuing a new policy..... [#permalink] 08 Nov 2012, 07:13

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Q. Insurance Company X is considering issuing a new policy

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