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