Question

An insurance company will only sell its select policy to people for whom the probability of developing emphysema in the next 10 years is less than 0.01. If a smoker with a systolic blood pressure of 180 applies for a select policy, under what condition will the company sell the smoker the policy if it adheres to this standard?

a. The smoker pays a higher premium.
b. The smoker provides a co-signer.
c. The smoker passes a health screening.
d. The smoker agrees to quit smoking

Answer 1

The insurance company will sell the policy to the smoker if they pass a health screening that shows a risk of developing emphysema less than 0.01. The company employs strategies to combat adverse selection, such as health screenings or mandatory insurance purchase, to maintain market stability.

Step-by-step explanation:

The question asks under what condition an insurance company will sell a select policy to a smoker with a high systolic blood pressure, given the standard that the probability of developing emphysema in the next 10 years must be less than 0.01. The insurance company faces a situation of adverse selection, where high-risk individuals are more likely to purchase insurance, potentially leading to losses for the insurer. To mitigate this, the insurer may require a health screening to assess the individual's risk more accurately.

In the broader context, adverse selection can lead to market failure if not addressed. The insurance company has options to counteract this, such as the aforementioned health screenings, or through methods like grouping insurees by place of employment or requiring all individuals to purchase insurance, as mandated by laws such as The Patient Protection and Affordable Care Act.