The theory of adverse selection predicts that the potential purchaser has asymmetric information, more than the seller does, and with hidden information about the risk they will incur. As a result, potential purchasers tend to buy the policy that is the most favorable to them. For example, an insurer with a low mortality rate might charge $12 per $1,000 of coverage. At this price, the insurer is expecting to break even and the insured would be most likely to buy the policy.
Basic principles of rate-making
A basic principle of rate-making is the adherence to a set of guidelines. These guidelines should be easy to understand and should be designed to minimize the likelihood of consumer dissatisfaction. In addition, the rating system should be responsive to changes in loss exposures and economic conditions. Loss control activities should be encouraged, as these reduce the frequency and severity of losses, which tends to keep insurance costs low.
One of the main goals of rate making is to determine the lowest premium for a given risk class. A large part of this process involves identifying the characteristics of a risk group that can be used to predict the future loss of the risk. This information is used to determine the premium for the individual or company. The rate is determined by multiplying the exposure units by the number of units of protection purchased. However, premiums should not be too low or too high because it will drive customers away.
Cost differences influence pricing
In 2009, premiums for individual market policies will average about $5,000 per year for single coverage and $13,000 for family coverage. Compared to employment-based plans, premiums for individual policies will average about one-third lower for single coverage and half that for family coverage. This difference in cost is due in part to the fact that individual policies cover a smaller percentage of health care costs, which encourages fewer services use. However, insurance premiums for individual-purchased policies also tend to have higher administrative costs than those of employment-based plans.
Benefits of insurance coverage
In times like these, insurance is a necessity, as it minimizes the impact of losses and damages. In addition to financial assistance, insurance coverage also provides a sense of security to policyholders, because a policy requires paying a small premium that is deducted from their income each month. These funds are used for a variety of purposes, from settling claims to funding the operation of insurance companies. Insurance coverage benefits the economy, too.
First, it helps in mobilizing domestic savings and directs them to productive channels, such as investment funds and money market instruments. Second, it protects insurers’ capital against losses and facilitates trade by spreading risks among the insured community. Finally, insurance policies promote trade and mobilize domestic savings. This enables the government to spend more money on other important areas of society. These are just some of the benefits of insurance coverage. The costs of healthcare are rising every day, and people are increasingly turning to insurance for peace of mind and financial protection.
Government participation in insurance markets
Although some of the recent actions by governments have come at the invitation of insurers, others have been met with skepticism or hostility. In recent years, political and economic forces have coalesced around calls for greater government involvement in insurance markets. What are the implications of this trend for insurance companies, consumers, and regulators? What is the role of government in the insurance market? And how can we limit its potential to affect insurance prices?
The government plays four major roles in the insurance market. It subsidizes insurance, mandates residual markets, and holds insurance premiums down. In order to effectively regulate insurance markets, it should encourage the growth of accredited risk information providers. The benefits of such government involvement are significant and the government should consider the advantages of a broader regulatory approach to insurance. This is especially true in high-risk markets such as auto insurance. It also plays a critical role in ensuring that insurers get paid.