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In: Economics

How can insurance companies offer a guarantee to pay for certain medical expenses? How do they...

How can insurance companies offer a guarantee to pay for certain medical expenses? How do they determine the appropriate premium to charge?

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Expert Solution

Insurance companies provide cover for the risks. Their main aim is to minimize the risk of the policy holders. For this reason they charge premium from policy holders. The amount of premium depends upon person to person. The amount of premium is calculated by statistical and mathematical methods. They collect the data of the person who wants to be insured. The data is about his life history, age, occupation, health etc. By considering these factors the amount of premium is decided. For example A 20 year old car racer wants medical insurance then the premium charged from him will be high as compared to 20 year old person who drives a normal car in the city. This is because the life of car racer is more risky and there are greater chances of him meeting an accident. Therefore while Entering the contract, a deep inspection is done related to the person's life, vehicle reports, past accidents, family background etc. After collecting all this, the report is anaylised by the actuaries and they predict the chances of happening the event and the amount that the insured can pay.

Rahul Sunny answered 2 years ago
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