In Argonia the average rate drivers pay for car accident insurance is

Question

In Argonia the average rate drivers pay for car accident insurance is regulated to allow insurance companies to make a reasonable profit. Under the regulations, the rate any individual driver pays never depends on the actual distance driven by that driver each year. Therefore, Argonians who drive less than average partially subsidize the insurance of those who drive more than average.
 
The conclusion above would be properly drawn if it were also true that in Argonia

(A) The average accident insurance rate for all drivers rises whenever a substantial number of new drivers buy insurance.

(B) The average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average.

(C) The lower the age of a driver, the higher the insurance rate paid by that driver.

(D) Insurance company profits would rise substantially if drivers were classified in terms of the actual number of miles they drive each year.

(E) Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers.

mbaiseasy · Accepted Answer

Insurance = not based on distance driven
Therefore, those who drive less partially subsize the cost of those who drive more
　　
Use the Assumption Negation for (B) the ave. cost of insurance for those who drive less is equal average cost of those who drive more.
The argument will fall apart if this assumption is false. If the cost are just the same, then "partial subsidy" is not going to happen.

（A） the average accident insurance rate for all drivers rises whenever a substantial number of new drivers buy insurance
   substantial new drivers causing increase in insurance rate is not anywhere in the argument; no tie to the conclusion

（C） the lower the age of a driver， the higher the insurance rate paid by that driver
   age is not relevant to the conclusion

（D） Insurance company profits would rise substantially if drivers were classified in terms of the actual number of miles they drive each year
   future prediction is not claimed anywhere in the argument

（E） Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers
   we need an assumption for those who drive less and drive more

vishu1414 · Answer

Well ,I believe its Support the argument Type Question .

Conclusion is - Argonians who drive less than average partially subsidize the insurance of those who drive more than average.

To support this if we prove that they(one who drive less )actually cost less to Insurance - this will further strengthen Argument.i.e more Sound Argument.

This is what  B doing

getgyan · Answer

+1B

2 drivers
1 drives 100 km per month other drives 1000km per month

Insurance cost for both = ((1000+100)/2) = 550 per month (Suppose Insurance cost is same as the average number of km driven) = 600 (50 profit)

If only 1 drivers then insurance cost – 100 per month i.e. 150 after profit
If only 2 drivers then insurance cost – 1000 per month i.e. 1050 after profit

We see that the insurance cost gets subsidized for those who drive more by 450. Is not it?

What did I assume in my solution? “Suppose Insurance cost is same as the average number of km driven” i.e. the average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average

:-D

Pansi · Answer

In Argonia the average rate drivers pay for car accident insurance is regulated to allow insurance companies to make a reasonable profit. Under the regulations, the rate any individual driver pays never depends on the actual distance driven by that driver each year. Therefore， Argonians who drive less than average partially subsidize the insurance of those who drive more than average.
　　
The conclusion above would be properly drawn if it were also true that in Argonia
　　
（A） the average accident insurance rate for all drivers rises whenever a substantial number of new drivers buy insurance –  IMO POE does not immediately eliminate this. But logically, here, we are discussing about the ones who drive more miles and the ones who drive less. So this statement is not relevant. 
（B） the average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average.  On hold. 
（C） the lower the age of a driver， the higher the insurance rate paid by that driver –  Goes out in the the first instance of POE application. 
（D） Insurance company profits would rise substantially if drivers were classified in terms of the actual number of miles they drive each year-  On hold.  
（E） Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers.  Goes out in the the first instance of POE application. 
 
 I was stuck between B&D. Chose D instead of B, the OA. In hindsight B looks to support the Argument more directly compared to D, which is generic.

veergmat · Answer

Insurance rate is fixed irrespective of the distance driven.This method allows ins co. to make profit.
Those who drive more also pay subsidized amount as compared to less driven.

All these conditions are fulfilled only when option B is satisfied.

luismmendivil · Answer

How could I know to which level (500, 600, etc) does this question fit in?

Abhishek009 · Answer

I suggest you go through these posts -
  
1.  GMAT Critical Reasoning Question Directory by Topic & Difficulty

2.  150 Hardest Critical Reasoning Questions

These will give you an idea...

chesstitans · Answer

another assumption can be made is an assumption about the insurance price paid by drivers. Surely, that assumption has the same idea with the assumption in this question.

AkshdeepS · Answer

（A） the average accident insurance rate for all drivers rises whenever a substantial number of  new drivers buy insurance

（B） the average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average

（C）  the lower the age  of a driver， the higher the insurance rate paid by that driver

（D） Insurance company profits would rise substantially if drivers  were classified  in terms of the actual number of miles they drive each year

（E） Drivers who have caused insurance companies to  pay costly claims generally  pay insurance rates that are equal to or lower than those paid by other drivers

Only B talks about "average cost and the driving distance"

robu1 · Answer

Kindly explain how B is right answer and E is not.

jaisonsunny77 · Answer

A. the average accident insurance rate for all drivers rises whenever a substantial number of new drivers buy insurance  -  this does not explain the conclusion.

B. the average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average - we can infer from this that since the insurance cost incurred on insuring drivers who drive less than the annual average, the insurance company has more funds that it can allocate to drivers who drive more than the annual average. If the latter receives more financial support (in terms of reimbursements) from the insurance companies, then these drivers end up paying less from their pockets. (B) is therefore necessary to establish the conclusion. Hence,  (B) is the right answer choice .  
 
C. the lower the age of a driver， the higher the insurance rate paid by that driver  -  irrelevant. 
  
D. Insurance company profits would rise substantially if drivers were classified in terms of the actual number of miles they drive each year  -  the conclusion is not concerned with 'how to increase' profitability of insurance companies.  
 
E. Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers   -  irrelevant to the conclusion drawn.

krishsaisree · Answer

This is a support the conclusion question.

Conclusion: Avg. Insurance rate (IR) for people who drive less is lower than those who drive more. But premise also states that insurance rate is NOT dependent on distance driven.

A. the average accident insurance rate for all drivers rises whenever a substantial number of new drivers buy insurance 
   --> This just states that average IR rises for everyone if new people sign up. Irrelevant. Discard

B. the average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average
  --> If IR is higher for people who drive more although it doesnt depend on distance (acc to regulation), this option states the reason--> It's due to the cost of getting the drivers insured on the company's side 
 
C. the lower the age of a driver， the higher the insurance rate paid by that driver
  --> Discard, nothing to do with the premise or conclusion

D. Insurance company profits would rise substantially if drivers were classified in terms of the actual number of miles they drive each year
  -->Attacks the premise, discard!

E. Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers
  --> Has nothing to do with premise/conclusion. Discard!

emcheeks · Answer

I couldn't find any explanations that makes sense to me under this problem. So here is my take:

(B) The average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average.

It is very important to understand that the drivers who drive less and the ones who drive more pay about the same rate! How do we know that? -->

From stimulus, we know government regulate the insurance rates, and the rates are never dependent on mileage. THEREFORE, the drivers who drive less and the ones who drive more will either both have the same rate or have different rates based on other factors (car models, years, driver age etc.). However, the later one (car models, years, driver age etc.) is irrelevant in this problem. Therefore, we can assume that they have about the same rate!

(tbh, I feel that this is too much to think about especially when you are taking the actual test. But you can always approach to this answer by POE. But what I just said above is only for the sake of explaining this specific problem since I was really confused about this answer as well.)

Come back to the answer choice. Now we know two groups cost the same. And note that the average cost here is for the insurance companies not the customers! Therefore, from insurance companies' standpoint, let's say the cost for drivers who drive less is 100, but the cost for companies are 40. Then they would save the 60 bucks and use it on insuring the drivers who drive more. The drivers who drive less are indirectly subsidizing the people who drive more.

(E) Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers.

I chose this one at first. And this is how I understand it now:

From my analysis above about B, we get that two kinds of drivers cost about the same (which makes this choice wrong). BUT let's say you didn't know that when you are working on this problem:

Do we have to assume this? Negating this, drivers who drive pay more pay higher than those who drive less. However, even if drivers who drive more are paying more, that doesn't necessarily mean that the drivers who drive less are not subsidizing --> Negating this doesn't weaken the conclusion! Let's put them into simple figures:

Attachment:

Snip20200711_2.png [ 17.46 KiB | Viewed 20432 times ]

Drivers who drive more are paying higher than the ones who drive less (negation example of E), and at the same time, cost to insurance companies on insuring those who drive more are a lot higher than those who drive less. From this table, we can tell the subsidizing thing actually does take place! Negation of E doesn't weaken the conclusion --> E is wrong.

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Ranasaymon · Answer

(E)  Drivers who have caused insurance companies to pay costly claims  generally pay insurance rates that are equal to or lower than  those paid by other drivers.

We are concerned with the drivers who drive less and those who drive more. Option E focuses on different kind of drivers. That's why E is incorrect.

p456 · Answer

I selected E at first. Then later realised beautiful word play of B. Here' my take on option B and why it is correct.(I never understood any of the above explanations)

we are told 1: "Argonians who drive less than average partially  subsidise  the insurance of those who drive more than average."
and 
we are told 2: "insurance companies make reasonable  profit ."

=>  we can say : those who drive less->pay more to insurance companies and who drive more->pay less.

B says that "cost to insurance companies from those who drive less is less than those who drive more"  means  those who drive less have minor damage so  cost to insurance company is less  and eventually they make more  profit . Likewise we can say those who drive more have major damage, so cost to insurance company is more.

=> "Argonians who drive less than average partially subsidise the insurance of those who drive more than average."

Sonia2023 · Answer

This is a good question.

Conclusion: Argonians who drive less than average partially subsidize the insurance of those who drive more than average.
Evidence: The rate any individual driver pays never depends on the actual distance driven by that driver each year.

Now why is the author concluding that drivers who drive less are subsidizing the insurance premium for those who drive less? I can only assume this when I know that the costs of servicing is lower for those who drive less.

For instance:
 Say X and Y both invest $100 and $1000 resp in shares through a wealth manager (WM). The WM charges a fixed fee of $10 each account. When can we say that X is kind of subsidizing the fees for Y? Only when the costs for servicing X ($4) is lower than Y ($6). Think about it. Because cost of servicing X is lower so premium for X should have been lower but she is paying more. Why? Because it helps the WM to balance the costs.

Now assume, the costs of servicing were same for X, then the same premium is justified. If the cost of servicing is higher for X than for Y, Y is subsidizing the payment for X.

Only B is the relevant choice which addresses this issue and relates to the right segments (who drive more and who drive less).
Let's negate the choice:

(B) The average cost to insurance companies of insuring drivers who drive less than the annual average is  equal /more  than the average cost of insuring drivers who drive more than the annual average. 
My conclusion is no longer valid. If the cost is higher for insuring drivers who drive less, then they are not subsidizing the premium paid by drivers who drive more. They are paying higher because the cost to service them is higher.

E was a contender for me at first.

(E) Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers.

We are just concerned with the premium amounts and not the claims. 
Negate: Drivers who have caused insurance companies to pay costly claims generally  do not   pay insurance rates that are equal to or lower than those paid by other drivers. 
Here the argument is who drives less and who drives more and not about who takes more claims and who takes less. The segment is different.

btsaami · Answer

Conclusion:  Argonians who drive less than average partially subsidize the insurance of those who drive more than average.
 Premise:  Under the regulations, the rate any individual driver pays never depends on the actual distance driven by that driver each year.
 Assumption:  cost related with the above two groups are almost same. 
Question type: ASSUMPTION 
 Why correct?  B) Exactly the same as assumption. Since the average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average, are paying more premium and therefore subsidizing for those who drive more.
 Why wrong?  A) Out of scope as it just says new drivers have to pay more insurance (increasing the avg.) but doesn't answer whether drivers who drive less subsidize drivers who drive more.

(C) Out of scope-> doesn't mention whether is it because younger people drive more and others subsidize their premium as well.

(D) Classification of drivers to increase profits doesn't provide any information on whether customer driving less will still partially subsidize for drivers who drive more.

(E) Out of scope. This is talking about drivers who have caused insurance companies to pay costly claims and not generally who drive more.

aasthudragonpixie · Answer

GMATninja2  I am unable to understand the answer to this question.. can you please help?

guddo · Answer

In Argonia the average rate drivers pay for car accident insurance is regulated to allow insurance companies to make a reasonable profit. Under the regulations, the rate any individual driver pays never depends on the actual distance driven by that driver each year. Therefore, Argonians who drive less than average partially subsidize the insurance of those who drive more than average.
 
The conclusion above would be properly drawn if it were also true that in Argonia

The argument says drivers do not pay insurance based on how much they actually drive, and then concludes that below-average drivers subsidize above-average drivers.  The key missing link  is that  driving less must actually cost insurers less, on average, than driving more . If that is true, then charging rates that do not reflect mileage makes lower-mileage drivers overpay relative to their risk and higher-mileage drivers underpay.

(A) The average accident insurance rate for all drivers rises whenever a substantial number of new drivers buy insurance.

This does not help. It says something about what happens when new drivers enter the system, not about whether lower-mileage drivers are subsidizing higher-mileage drivers.

(B) The average cost to insurance companies of insuring drivers who drive less than the annual average is less than the average cost of insuring drivers who drive more than the annual average.

This is correct. If lower-mileage drivers cost less to insure, but rates do not depend on mileage, then those drivers pay more than their fair share relative to cost, while higher-mileage drivers pay less than their fair share. That is exactly the subsidy claim.

(C) The lower the age of a driver, the higher the insurance rate paid by that driver.

This is irrelevant. It shows that rates can depend on age, but it does not connect subsidy to mileage.

(D) Insurance company profits would rise substantially if drivers were classified in terms of the actual number of miles they drive each year.

This does not establish subsidy between low-mileage and high-mileage drivers. Higher profits under a different system does not show who is subsidizing whom under the current system.

(E) Drivers who have caused insurance companies to pay costly claims generally pay insurance rates that are equal to or lower than those paid by other drivers.

This suggests a possible subsidy based on claims history, not based on mileage. So it does not justify the stated conclusion.

Answer: (B)

In Argonia the average rate drivers pay for car accident insurance is

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In Argonia the average rate drivers pay for car accident insurance is

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