Nationside, an insurance company, is considering issuing a new policy

Question

Nationside, an insurance company, is considering issuing a new policy to insure automobile drivers who are elderly and have a record of car accidents. If premiums for the new policy are inappropriately high for a potential customer, that customer will not opt for the new policy. Therefore, Nationside 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 maximize Nationside's profits from the new policy?

A. Marketing the new policy to older drivers with a history of automobile accidents of any type

B. Marketing the new policy to older drivers with a history of minor automobile accidents only

C. Marketing the new policy to younger drivers with no history of automobile accidents

D. Marketing the new policy to younger drivers with some history of automobile accidents

E. Marketing the new policy to older drivers who were rejected by other companies for similar policies

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tgsankar10 · Answer

strategies would be most likely to maximize Nationside's profits from the new policy
To maximize profits one should increase revenue or minimize costs or both
If premiums are high less people will opt for policy. Hence increasing revenue is less likely an option.

A:  NO.  It will cost more for major accidents. It is less likely a viable option

B: Correct.   Older persons with histroy of minor accidents will most likely reduce the payout cost in comparison to giving policy to all elderly with accident history

C:  NO.  Irrelevant. Policy is for elderly people
D:  NO.  Irrelevant. Policy is for elderly people
E:  NO.  Accident history of older drivers are not included. Hence it could lead to more payout due to accidents.

Answer is B

bronaugust · Answer

To solve this question, you may adopt the    IMS's four-step approach   .

STEP #1  - FIGURE OUT THE QUESTION TYPE BY READING THE QUESTION STEM

The question stem states, 'Which of the following strategies would be most likely to maximize Nationside's profits from the new policy?' Clearly, we are to look for an answer option that will help the company maximize profits from the new policy. Now that we know the type of question we are dealing with, we may proceed to the second step.

STEP #2  - READ AND X-RAY THE ARGUMENT/PARA

Let us now state the facts mentioned in the para and draw inferences wherever relevant.

FACT #1  -> Nationside, an insurance company, is considering issuing a new policy to insure automobile drivers who are elderly and have a record of car accidents.

FACT #2  -> If premiums for the new policy are inappropriately high for a potential customer, that customer will not opt for the new policy. (INFERENCE: If premiums are not inappropriately high, the customer may opt for the new policy.)

FACT #3  -> Nationside is concerned that the income from the policies would not be sufﬁcient to pay for the claims that would be made.

STEP #3  - KNOW WHAT THE RIGHT ANSWER SHOULD BE DOING/FRAME A SHADOW ANSWER

We know we need to look for an answer option that will help Nationside maximize profits. In order to maximize profits, the income from the policies should be more than the amount paid for the claims that would be made, and the right answer should be a strategy that helps the company increase the gap between amount spent on claim and amount received via premiums. Now that we know what the right answer needs to be doing, we may proceed to the final step.

STEP #4  - ELIMINATE INCORRECT ANSWER OPTIONS

Strategies that go beyond the scope of the para and those that may minimize Nationwide's profits can be eliminated.

(A) Marketing the new policy to older drivers with a history of automobile accidents of any type -   LIKELY TO MINIMIZE PROFITS   -  Older drivers with a history of automobile accidents of any type may end up meeting with major accidents, and the claims made in the case of major accidents would obviously be high.  -   ELIMINATE

(B) Marketing the new policy to older drivers with a history of minor automobile accidents only -     LIKELY TO  MAXIMIZE PROFITS    -  Older drivers with a history of minor automobile accidents only are not very likely to meet with major accidents, and if they do meet with minor accidents, the claims made would not be too high. The company can also reduce its premiums so the customer may opt for the policy. -    KEEP

(C) Marketing the new policy to younger drivers with no history of automobile accidents -   LIKELY TO MINIMIZE PROFITS   -  Younger adults do not have a history of automobile accidents very likely because they do not have much experience, so they may still meet with major accidents in the future   and the claims made in the case of major accidents would obviously be high.   Also, there are chances for multiple claims to be made since they are young and would only  presently be gaining experience.  -   ELIMINATE

(D) Marketing the new policy to younger drivers with some history of automobile accidents -   LIKELY TO MINIMIZE PROFITS   -  This option is worse than the previous one as we are dealing with younger drivers with some history of automobile accidents. -    ELIMINATE

(E) Marketing the new policy to older drivers who were   rejected by other companies   for similar policies -   OUT OF SCOPE   -      That other companies rejected the older drivers will in no way help us determine what type of claims they are likely to make in the future. -    ELIMINATE

Hence, B has to be the right answer.

captain0612 · Answer

IMO Choice B

Evidence  - New insurance policy for  elderly . If the premium is too high, then customers will not opt for the policy, leading lower sales.
 Evidence  - Nationwide's concern that income would not be sufficient to pay claims. -> Sales < pay outs done in claims.

Conclusion  (Hidden as part of the question stem) - Nationwide would be able to maximize profit.

Question - Identify an answer choice that strengthens the conclusion. A strategy that maximizes profit.

Profit = Sales - Payouts (claims) . In order to increase profits, we could focus on reducing the payouts (or) Increase sales (in this case it might be unlikely given the high premium). Hence, best choice is to focus on reducing payouts.

A. Marketing the new policy to older drivers with a history of automobile accidents of any type  If this were the case, then payouts would increase as the customer profiles are risky.  Incorrect

B. Marketing the new policy to older drivers with a history of minor automobile accidents only   Correct  This strategy would attract least risky drivers (less likely to indulge in an accident), reducing the pay outs done in claims.

C. Marketing the new policy to younger drivers with no history of automobile accidents Policy is for older drivers.  We do not know whether this policy would work for younger drivers, as it is stated that it is exclusively for older drivers.   Incorrect

D. Marketing the new policy to younger drivers with some history of automobile accidents  Same as C  Incorrect

E. Marketing the new policy to older drivers who were rejected by other companies for similar policies  This could lead to even greater payouts, because other companies would have marked the profiles as risky and rejected them.  Incorrect

Bunuel · Answer

OFFICIAL EXPLANATION:

Reading the question: this prompt presents a fairly weak argument; the many vulnerabilities are potentially distracting. But we are asked something rather specific: which strategy will maximize profits in the new policy. It looks like we might be able to largely ignore the conclusion of the argument and focus on a critical detail. It's a perfect example of why we should keep an eye on the question stem while digesting the prompt.

Creating a filter: the phrase "most likely" is a case of logical understatement in the argument. We can prove by stronger terms and look for what's critical. That's maximizing profits. Profits are revenues minus costs, so our strategy will maximize profits and/or minimize costs. A fact is that the drivers are elderly and accident-having. They sound expensive to insure, but we can't change that parameter. We can at least hope they have minimal accidents. Let's take that prediction as our filter to the answer choices.

Applying the filter: Our prediction exists in the form of answer choice (B). Choices (C) and (D) argue with the facts: this policy is for elderly drivers. Choice (A) describes an option that will cost more than (B), since Nationside will have to pay out more to cover accidents, so it's only better if we can jack up the revenues in (A) much higher than in (B). But the second sentence of the argument implies that we can't do that. So (A) is objectively inferior to (B) and is out. Choice (E) is similar to (A): if the drivers were rejected by other policies, it's probably because they are more expensive. Or, if that's outside knowledge that we're not supposed to bring to bear on this question, (E) is simply irrelevant.

The correct answer is (B).

Nationside, an insurance company, is considering issuing a new policy

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