Question

In: Economics

Would a “Community Rating” type of equilibrium exist if individuals are not mandated to buy the...

Would a “Community Rating” type of equilibrium exist if individuals are not mandated to buy the insurance? Explain.

Solutions

Expert Solution

Yes, Community rating, as a basis for premium calculation, is fundamentally different from the usual method of determining insurance premiums, i.e. risk rating. In a risk rated insurance market, an insurer calculates the premium payable by a potential policy holder in order to enter into an insurance contract on the basis of various factors particular to that individual, such as the risk of a claim occurring, and the value of any such claims during the term of an insurance policy. In a community rated market, the insurer may not calculate premium on the basis of the risk factors attaching to the particular person wishing to purchase an insurance contract, but rather the risk factors applying to all persons within the market as a whole. Thus, in a community rated market, the insurer evaluates the risk factors of market population, and not those of any one person when calculating premiums.

  • Community rating — prohibits insurers from varying rates based on health status or claims history
    • Pure community rating — allows insurers to vary rates based on benefit design and family composition only
      • Limited variation in rates by geographic area is sometimes included in the pure community rating category (e.g. New York City)
    • Adjusted (modified) community rating— allows insurers to also vary rates based on demographic characteristics (e.g. age and gender) and lifestyle factors (e.g. tobacco use)
  • Guaranteed issue — requires insurers to issue insurance to any eligible applicant without regard to health status or other case characteristics.

To sum up, it can be said that community ratings does not depend on just an individual or some individuals but over a large zone of people to be called as community.


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