Question

Suppose that your friend applies for private insurance and resents the number of questions asked on the application. He states that since the primary contribution of insurance companies is to pool the risk of many individuals, they should care less about the characteristics of any one applicant and more about increasing the number of the patients that they insure. Furthermore, he states, when he had insurance through his employer, he hardly had to answer any questions. Use economic reasoning to explain to your friend the insurance company's behavior.

Answer 1

Insurance companies deals in the risk sharing and management of individuals and businesses. They contribute towards the losses and expenses partly or completely in the event of an incident covered under the contract/policy against the periodical premium payments by the insured. Whenever someone applies for insurance there are various checks done depending on the type of insurance to know the applicant best and offer them the best insurance services. In case of individuals questions are asked to better know the income level, the health status, the lifestyle and the personal characteristics of the applicant. Income level knowledge is necessary to gauge the premium payment ability of the applicant. Health status determines the risk involved in providing insurance services. Lifestyle suggests the expenditure and proneness to diseases of an applicant. Personal characteristics are obtained to provide better insurance products at their disposal. In case of insurance through employer the insurance company has all the required details of the applicant through the employer itself hence, the applicant is not probed for in depth details and even the product to be offered are already selected for them.