Question

1. The Double Indemnity Insurance Company offers an insurance policy to New York visitors. The term of the policy is for one week and covers the insured against financial losses suffered by being mugged. About 10% of the visitors to New York are mugged within any week period. If the visitor is mugged by a professional, losses totaling $2,000 will occur. If the visitor is mugged by an amateur, losses amounting to $500 will result. Sixty percent of the muggings in New York are performed by professionals. The new policy has a $50 deductible clause in it. If the premium is $200 for this policy, what is the expected profit to Double Indemnity?

Answer 1

1.Allows the company to attract middle aged customers who won't submit claims for years allowing the insurance company to collect years of premiums before they'll likely have to pay coverage for a claim. Correct answer.

2.The insurance policy is discussing coverage for elderly people, not children. Sure, there may be a correlation between getting sick as a kid or getting older, but the stimulus provides no support for it. Let's stick to the stimulus and not assume anything.

3.Would not alleviate the concerns of the company. In fact, the concerns would be magnified if they offered even MORE services under this policy at a low cost. This is an incorrect answer.

Which of the following strategies would be most likely to minimize Company losses on the policies?


(A) Attracting middle-aged customers unlikely to submit claims for benefits for many years.

(B) Insuring only those individuals who did not suffer any serious diseases as children.

(C) Including a greater number of services in the policy than are included in other policies of lower cost.

(D) Insuring only those individuals who were rejected by other companies for similar policies.

(E) Insuring only those individuals who are wealthy enough to pay for the medical services.