Insurance Company X is considering issuing a new policy to cover servi

Question

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

(B) 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

plumber250 · Accepted Answer

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 years This 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 children Not 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 cost Nope. 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

mikemcgarry · Answer

Dear crunchboss , I'm happy to respond. :-)

Many official CR questions are written to have the feel of business in the real world. This particular question would make much more sense if you have had a little experience with ins & outs of the insurance industry. First of all, it should be clear that (B), (C), (D), and (E) are all disastrous and would not lead to success, so in that sense, POE would lead to (A). I will not discuss those unless you have a question on them. Choice (A) is not out of scope, for the simple reason that "old age" doesn't have a fixed and definitive beginning. When does a human being start to get old? At 40? at 50? at 65? at 75? You see, there is not just a single clear beginning. Presumably, most of these diseases would afflict folks in, say, their 70s or 80s or 90s. If the company could get folks in their 50s and 60s to buy it, then that would generate lots of income from a temporarily lower-risk group, and of course, eventually those people would enter the higher risk group and need the insurance. Of course, if the insurance company wants to sell the insurance to people in their 50s, it obviously is not going to market the policy as "insurance for the elderly," because no one in their 50s would be interested in that. The company would have to find a creative way to package it (e.g. "addressing health concerns as we age") in order to appeal to folks in their 50s. People in their 50s are aware that they are not as young as they used to be, and they are starting to notice some of the effects of aging, so they naturally would be interested in any insurance that addressed health concerns associated with aging, even though the diseases of the "elderly" would still be a few decades away. I don't know how much you know about insurance, but the insurance industry does things of this sort all the time! The whole game about insurance is to get enough low risk people into the plan so that they can pay for the high risk folks, and toward that end, the insurance company usually has to market and sell the insurance to a lot of people who have little need for it. That's just the way the business works. Knowing about the way business situations are handled in the real world is very important for the CR: https://magoosh.com/gmat/2014/gmat-criti ... knowledge/ Does all this make sense? Mike :-)

JohnGaltMBA · Answer

A is most likely the correct answer:

A) allows the company to attract middle aged customers who won't submit claims for years allowing the insurance company to collect years of premiums before they'll likely have to pay coverage for a claim. Correct answer.

B) The insurance policy is discussing coverage for elderly people, not children. Sure, there may be a correlation between getting sick as a kid or getting older, but the stimulus provides no support for it. Let's stick to the stimulus and not assume anything.

C) Would not alleviate the concerns of the company. In fact, the concerns would be magnified if they offered even MORE services under this policy at a low cost. This is an incorrect answer

D) is tricky. It would allow the company to attract more customers which is what they want to do. But the company is concerned about providing the low cost coverage for people likely to get sick (the elderly). Answer choice D allows the company to attract customers, but does nothing to alleviate the potential cost burden. Contrast this answer choice with answer choice A) which allows both a method of attracting customers AND alleviating costs. As between the two, A is the better answer choice.

E) deals with wealth, but is not a great answer choice. Insurance covers the cost of medical services regardless of the income of the patients. Though the company may attract a wealthier clientele with E), E) still does nothing to help attract a broad base of customers (in fact, it suggests only attracting a minority of people) and it does nothing to alleviate the cost that the insurace company would have to pay in potential claims. Another way to think of this is: Old people will get sick whether they are rich or not. Being rich has no bearing on the company's liability under the insurance policy - at least not in this particular stimulus. Thus, E is incorrect.

summer101 · Answer

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?

BrainLab · Answer

Selected B.... wrong.

A.Attracting middle-aged customers unlikely to submit claims for benefits for many years .... wrong. Talking about the wrong group of people. 
B.Insuring only those individuals who did not suffer any serious diseases as children -> in MY opinion the right answer. Although there is may be no cennection between having serious deseases as children and elderly people,  BUT A shifts the group from elderly people on middle-aged people... Argument is talking about another group of people, how can be choice A correct ??  
C.Including a greater number of services in the policy than are included in other policies of lower cost -> it makes the situation even worse - more services for the same price
D.Insuring only those individuals who were rejected by other companies for similar policies -> it makes the situation even worse.
E.Insuring only those individuals who are wealthy enough to pay for the medical services -> being rich doesn't mean that rich people pay higher premiums.

Why should middle-aged people buy polices with service portfolio for elderly people ?

Can the experts please explain this one.. ! Which question type is it ?

erikvm · Answer

This is actually a strengthen question. And (A) only states that they should  attract  those people. How they do it, well, that's another story.

In theory, they could say "Hey, if you sign up now, at the age of 50, we'll give you a discount on donuts for 2 weeks" - However they choose to attract the people is irrelevant, but it's only about getting them to sign on early --> pay premium --> once they get old and sick, the insurance company has collected enough money (because they signed up early) to actually pay them.

Imagine this: You sign up for a life-insurance and you get hit by a car the day after - thats a huge blow for the insurance company. But if you've been a customer of that insurance company for 40 years, getting hit by a car is  not   as  costy for the insurance company

OptimusPrepJanielle · Answer

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  If Company X attracts income from policies but does not have to lose money from policy claims it will minimize losses. 
B.Insuring only those individuals who did not suffer any serious diseases as children  The current status of health of policy holders is relevant, not their childhood health. 
C.Including a greater number of services in the policy than are included in other policies of lower cost  This would increase expenditures. 
D.Insuring only those individuals who were rejected by other companies for similar policies  Insuring people with more severe health problems might also increase expenditures. 
E.Insuring only those individuals who are wealthy enough to pay for the medical services  Even if individuals are wealthy enough to pay, Company X can spend more money on policy coverage than they receive.

OptimusPrepJanielle · Answer

"SC followup question: In the 1st sentence of the Stimulus, is it correct to say "considering issuing" ? Isn't it more appropriate to say "considering to issue" ? "

Consider  can be followed by a gerund or noun phrase. So although it sounds strange, "considering issuing" is correct.

RichaChampion · Answer

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 
B.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

OG13 CR Q#53

Sir,
The Official answer for this Question is Option A, but after spending so much time I still find it Out of Scope because it deviates from the Sample Enough.

Questions Stem Defines the sample Space : elderly people
Now Option A completely deviates and talks about middle-aged customers

Middle aged Customers are not equal to Elderly People. middle-aged customers are absolutely different age group.

adkikani · Answer

GMATNinja   VeritasPrepKarishma   GMATNinjaTwo

Do experts agree that is is not a classic EVALUATE Q?
I did not find adding 'whether' before each ans choice was correct approach.

Should we ideally approach this Q as a strengthener type?

GMATNinja · Answer

As we've said before (i.e. in  this post ), accurately determining the question type is not necessarily useful or required. Nevertheless, I'm not sure whether "strengthener" is accurate. What are we trying to strengthen? That Company X is concerned? That the income from the policies would not be sufficient to pay for the claims that would be made?

Look at each answer choice... does it describe a strategy that would LIKELY minimize Company X's losses on the policies? If not, eliminate it. If so, keep it. Regardless of the question type, you HAVE to be clear about what the passage says and what is being asked. The GMAT is creative with the question stems, and not everything will fit neatly into a particular category of question types. This is part of what makes these questions so tough, and unfortunately there's no way around the (sometimes difficult) work of figuring out exactly what you're being asked -- even if it's something you've never been asked in another GMAT question before.

For anybody that hasn't already read it, the  Ultimate CR Guide for Beginners  discusses a generalized approach to CR that does not rely on question type.

I hope this helps!

TheUltimateWinner · Answer

Hello,
 RonPurewal ,  MartyTargetTestPrep ,  jennpt ,  AjiteshArun ,  ccooley ,  DmitryFarber ,  GMATNinja ,  VeritasKarishma ,  MentorTutoring ,  AaronPond 
How will the Company X minimize it losses by choosing the choice A?
Better if you give your insights.
Thanks in advanced...

AndrewN · Answer

Hello,  Asad . Notice the conclusion, if I may chop and channel, that Company X is  concerned  that income from selling  policies to cover services required by elderly people who suffer from diseases  that afflict the elderly   would not be sufficient to pay for claims made by the insured. How can the company get income to exceed claims costs? If it  attracts  middle-aged customers to purchase this new policy, and this group will not likely need  to submit claims for benefits for many years , then for the time being, this is almost a pure profit scenario, regarding the group in question. That is, sell healthy, non-elderly people a policy that they will not use for a long time, thereby raising cash that will probably not need to be touched for years (by which time, presumably, other middle-agers could have bought into the same sort of policy to ensure a fair amount of money stayed in the hands of Company X). This makes perfect sense, and it happens all the time in the insurance industry, where the idea is to get people to pay for nothing upfront  just in case .

- Andrew

EatMyDosa · Answer

plumber250 :

I am not sure if we can say that option C is  not relevant  !

I think  option C  is  relevant , though  incorrect . The implication of option C is that company X would further  restrict its customer base  of older people because of the condition/pre-requisite ("  no serious disease as children  "). If company X has fewer customers to target for its new policy, this strategy would not likely minimize its losses.

Let me know your thoughts on this?

krndatta · Answer

AndrewN  
Please critique my reasoning below:-

Option A:- This is the correct answer choice because if the insurance company attracts those customers who are unlikely to submit claims for benefits for many years then this would help the insurance company minimize their losses. The middle-aged customers would not submit the claims and the insurance company will not give any payouts. Hence, they would be able to minimize the losses.

Option B:- Insuring a specific part of the population will not help minimize the losses. Furthermore, if they as children didn't suffer any disease, there is no guarantee that as adults too they would not suffer any disease. They might develop some problems in their adulthood.

Option C:- Doing this would increase the losses of Insurance Company. Because at the same rate initially the company used to give 10 services, now the company is giving 20 services. Hence, this would increase the company's losses.

Option D:- Doesn't help resolve the problem at hand. How insuring a specific part of the population would be beneficial. We don't know that.

Option E:- Again this doesn't resolve the problem at hand. The strategy mentioned in this option statement goes without saying. The insurance company would definitely insure only those individuals who are capable of paying. Hence, this is incorrect too.

AndrewN · Answer

Hello,  krndatta . I meant to get to your request much earlier, but the day had other plans. (I spent part of my break time in the middle of the day trying to track down a chipmunk that ran into my garage. I still have no idea whether the little guy made it out.) Anyway, my take on your analysis:

Option A may be a bit extreme. When dealing in likelihoods that are purely hypothetical,  would  is better than  will : since middle-aged customers would not be likely to submit claims, the insurance company would likely offer fewer payouts and be able to minimize losses from those payouts.   Option B looks spot on.   Option C seems like a no-brainer, even if, once again, we are only dealing in likelihoods: would  likely  increase losses.   Option D is similar to B in restricting the pool of insured individuals, and the lower the number of people putting money into the system, the less money there would be  to pay for the claims that would be made .   Note that in Option E, there is a difference between  individuals who are capable of paying  for  medical services , as the answer choice says, and those capable of paying insurance premiums to cover those medical services. The insurance company would definitely want to collect premiums from its customers, but the way I read E is that Company X would only insure people who would be able to afford the costs of medical services  on their own . Such a move would, in all likelihood, severely restrict the inflow of cash for Company X (unless carrying the policy somehow became seen as a status symbol for the wealthy).

Thank you for thinking to ask for my input. Keep going with your analyses. You will develop a keener eye for the CR task and help others in the process.

- Andrew

Tanchat · Answer

Dear experts :  GMATNinja   AndrewN

Why is (B) wrong?
We are talking about elderly people, but (A) does change the target group from elderly people to middle-aged people. (In Business World, it may not be weird, but is it acceptable in GMAT?)
I know that (B) may require an assumption that someone who didn't suffer any serious when they are a child may unlikely to claim for benefits. However, (A) does as well. Why middle-aged customers would be interested in an insurance package covering services required by elderly people?

AndrewN · Answer

Hello,  Tanchat . If someone purchases an insurance policy, then that person receives the coverage of that policy. I think you may be misinterpreting  a new policy to cover services required by elderly people  to mean that only elderly people are covered by that policy. Answer choice (A) introduces another group for whom the policy might not be  required  (because these people may be in relatively good health), but for whom it may provide peace of mind—i.e. just in case the person develops a disease that more typically afflicts the elderly, or may develop such a disease within a couple years. This is, incidentally, just how health insurance works in real life, with younger people, those less likely to need medical treatment, paying lower premiums for coverage than their higher-risk elderly counterparts.

Answer choice (B) focuses on  diseases , but the wrong kinds. Those that afflict children are not the same as those that afflict the elderly, so that part is irrelevant to the matter at hand unless some correlation could be established between the two. Furthermore,  only  is extreme. By restricting the pool of applicants, the insurance company would be acting against its own interests  to attract customers . Answer choice (A) fills the logical gap that the question stem calls for: the company will stand to attract more people who will not need to submit claims  for many years , thereby raising money right now  to minimize... losses on the   policies .

Perhaps the two answer choices make more sense now. Thank you for thinking to ask.

- Andrew

aumd568 · Answer

AndrewN In my analysis I eliminated Option (D) using the following reasoning - Option (D) kind of hurts the plan since the individuals who are rejected by other insurance firms are more likely to have some obvious red flags. Do you think this was appropriate or this would be jumping the gun too much? Although this is my first time asking you a question, I have gone through a lot of your replies and find them very helpful. Your replies really help a lot of students

-Aum

Insurance Company X is considering issuing a new policy to cover servi

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