Final answer:
Mortality risk fees and operating expense risk fees are designed to protect the insurance company by ensuring it can cover claims, operational costs, and profit, while accounting for varying risk levels across policyholders.
Step-by-step explanation:
Mortality risk fees and operating expense risk fees are instruments designed primarily to protect the insurance company. These fees are part of the pricing strategy that ensures an insurance company can cover 1) the average person's claims, 2) the costs of running the company, and 3) leave room for the firm's profits. The fees are calculated based on the risk profile of different groups, ensuring that policyholders with higher risks pay more to account for the potential higher costs of their claims. This concept is known as actuarial fairness and is crucial to maintaining a sustainable insurance system.
Individuals are categorized into different risk groups based on various factors, such as personal habits, genetic predispositions, and environmental factors. These fees become critical under circumstances like a predominance of high-risk policyholders due to phenomena like adverse selection, where people more likely to file claims are those who typically obtain insurance, leading to the potential for losses by the insurer.
The mortality risk fee is specifically applied to life insurance and annuities, covering the risk of an insured person dying sooner than expected and triggering a payout. Meanwhile, the operating expense risk fee addresses the uncertainties in administrative costs and operations of the company. Both fees are part of the underwriting process, which plays a vital role in the insurance industry's approach to sharing and managing risk.
The framework of fee-for-service health systems, as opposed to health maintenance organizations (HMOs), also relates to how these fees function. Fee-for-service models may encourage moral hazard, where insured parties may not take as much precaution against risks, knowing they have coverage. This stands in contrast to HMOs, which have different reimbursement models and potential cost-sharing risks. Understanding mortality and operating expense fees can help to grasp the larger fabric of the insurance and health care financing landscapes, which can include Medicare, Medicaid, and the complexities introduced by the Patient Protection and Affordable Care Act (ACA or Obamacare).