Question

Zach is a 5-year-old boy who recently split his chin open after tripping on the sidewalk, and he was rushed by his parents to the emergency room at a nearby hospital. Although an MRI revealed that Zach needed only stitches and some mild pain medication, his medical bill for the hospitalization and tests totaled $4,178. Zach is covered under his parents' insurance policy, which has a $200 hospital stay deductible and a coinsurance rate of 20%. His parents can therefore expect a reimbursement from the insurance company of $ _________ (Note: Round your answer to the nearest dollar.)

Complete each statement that follows with the appropriate insurance term.

Zach's fall was completely unexpected and therefore insurable. This is an example of: a. Physical hazard b. fortuitous loss c. speculative risk d. morale hazard e. moral hazard It is easier for the insurance company to predict the risk associated with an entire town than to predict the risks of a given individual. This reflects the: a. law of large numbers   b. principle of indemnity c. large-loss principle

Because Zach is young and has no history of medical conditions, he is a part of the: a. substandard b. preferred c. desirable class of insured.

Answer 1

Under a health insurance, deductible means the amount that is to be paid by the insured.

So, for $4,178 medical bill, $200 hospital stay will have to be borne by insured,i.e,Zack’s parents

Further, coinsurance rate is the percentage of medical bill after deductible that is to borne by the insured. The balance is paid by the insurance company. So,

20% coinsurance = 20% * ($4,178 - $200) = $795.60

So, Zack’s parents will have to pay $200 + $795.60 = $995.60

Reimbursement by the insurance company = $4,178 - $995.60 = $3,182.40 rounded off to $3,182

Zach’s fall is an example of b. fortuitous loss, which is a loss by pure accident with no intention of loss.

Option a. is incorrect because physical hazard means a condition which increases chances of loss, for e.g., if a person is alcoholic chances of loss to insurance company is higher as compared to non-alcholic person

Option c. is incorrect because speculative risk means an event that is subject to speculation,i.e., it may produce a profit or loss.

Option d. is incorrect because moral hazard means becoming negligent knowing that you are insured and loss,if any, would be borne by insurance company. For e.g., after insurance is taken, indulging in alchol and smoking which are likely to pose health risks.

It is easier for insurance companies to predict the risks associated with entire town than the risks associated with an individual because of Option a. Law of large numbers. As per the law of large numbers, when the data set is large, the distribution of data and therefore, the variation and mean and other statistics can be predicted with greater accuracy.

Option b. is incorrect because principle of indemnity means that in the event of loss, insured will be indemnified (made good) by the insurer for the loss such that his original position before loss is restored (not more or less).

Option c. is incorrect because large loss principle means that in an insurance large losses should be given higher priority than small losses.

Zach is a part of Option B. Preferred class of insured, since preferred class is the group which has less chances of accident/loss, owing to younger age, no health issues.

Other options are incorrect because substandard class means that group which has poor health and therefore, more chances of claim and desirable class is the standard class.