Question

A group of 10 people seek out an insurance company to underwrite health insurance for its members. The expected medical spending for this group is $50,000, or 5,000 per person on the average. An additional 10 people join the group who have expected medical spending of $10,000 per person on average. The premium (incorporating net loading costs of 5 percent) will be approximately

a. $7,200

b. $7,275

c. $7,500

d. $7,875

e. None of the above

Answer 1

The required premium for every individual would be computed for all 20 people in the new group as

= Total expected medical spending including net load cost / total number of people

= (50000 + 10000 x 10) x (1 + 5%) / (10 + 10)

= 7875

Hence select D.