ANSWER 1 Adverse selection is unfavorable selection of the life insurance applicant. The measure that the life insurance company can take to safe guard against adverse selection which is limits on age in sum insured, a medical examination may be required, MAR maybe obtain if it appears that the proposer is trying to conceal and adverse feature or if there is some feature which requires classification. Insurance markets are imperfect and are often characterized by information problems that pose substantial challengers to life and health insurance providers.
How to adverse selection and moral hazard complicate the supply of life and health insurance. In my own point, I think in terms of health insurance, adverse selection only purchase health insurance if it benefit to insured. The way adverse selection works if poor health and the insured have more of a tendency to buy a health insurance plan because all bills must be pay by own. Adverse selection fairly good health and therefore don’t find the purchase of a health insurance plan essential.
It makes sense to you because visiting the doctor once a year and paying a one-time fee is much more cost effective than making monthly health insurance payments. If you think there is a connection between adverse selection and why health insurance companies check out your medical history during the screening process. Prior to purchasing a health insurance plan, you are generally asked to fill out a lengthy medical history form, in which you answer specific health-related questions such as: •Do you smoke? •How much do you weigh? •What kind of diseases/health conditions run in your family? (High blood pressure, diabetes etc. •Have you ever been treated for a terminal illness? Health insurance companies are able to determine whether or not the insured will be a large financial liability to them. Unfortunately, based on that, insured are often either denied coverage or charged with higher premiums rates in order to balance the amount the health insurance company will be responsible to cover. Actually some insurance companies out there that will reward insured for not smoking and being in good health by offering special discounts on insured health insurance policy. For example of adverse selection is between smoking status and mortality.
Non-smokers averages are more likely to live longer than smoker. Life insurance will be a better buy for smokers than for non-smokers. So smokers may be more likely to buy insurance. The average mortality of the combined policyholder group will be higher than the average mortality of the general population. From the insurer’s viewpoint, the higher mortality of the group which ‘selects’ to buy insurance is ‘adverse’. The insurer raises the price of insurance accordingly. As a consequence, non-smokers may be less likely to buy insurance than if they could buy at a lower price to reflect their lower risk.
The reduction in insurance purchase by non-smokers is also ‘adverse’ from the insurer’s viewpoint, and perhaps also from a public policy viewpoint. The moral hazard, as it relates to health insurance it look at medical costs and health related to insured after join the insurance. In other words if you have an adequate health insurance plan, you’re more inclined not to stress over payment in the case of a medical emergency, as you know your out-of-pocket expenses will be alleviated by your health insurance company.
When it comes to the moral hazard of health insurance, you may also be less likely to keep up with annual physicals and other forms of preventative health care. In the end, it must think about the adverse selection and moral hazard of health insurance carefully. Even though you may be in good health now, you never know what the future holds for you and while you should remain positive, you also need to be prepared for unforeseen medical situations. If you already have a health insurance plan, you shouldn’t take it for granted.
While it may be tempting to neglect your routine check-ups and chalk it all up to the fact that if something should happen, you’re covered. ANSWER 2 Life insurer is interested in pricing its products so that the rates were fair, adequate and not excessive. If in adequate, can lead to serve financial problems. It should be sufficient to fund the current and future benefits promised plus cover related expenses. Rate equity changing premiums to the insured must commensurate with the expected losses and other cost that insured bring to the insurance pool.
Life insurance strive toward equitable treatment of insured by varying life and health insurance rates by factors such as age, sex, paln, health and benefits provided. They should not be excessive in relation to the benefits provided. If the rate adequacy can be considered as establishing a ‘floor’ for rates, the ‘rate not excessive. Calculation life and health insurance rates and value requires information:- •The probability of the insured event occurring. •The time value of money. •The benefits promised. •Loading to cover expenses, taxes, profits, and contingencies.
Insurance pricing based on the concept of pooling or loss sharing. The likelihood of losses in life and health in is shown by:- •Mortality tables. These show yearly probabilities of death. •Morbidity tables. This show yearly probabilities or other information on loss of health. •These tables constitute the foundations of life and insurance pricing. For example of life assurance product:- •Term life is the simplest type of life insurance. No cash value in the term. If you die during the term, the insurance company will pay the term, and vice versa. Whole life insurance gives you lifetime coverage at a premium rate that does not increase with your age after you buy it. Return money to you in dividend. And share profit if company have surplus. •Endowment can build cash value. The company pays the policy’s face amount whether or not you die during term. It have level premium. •Annuity may be defined as a periodic payment of time or the duration of a survival of a designated life or lives. •Health insurance benefits are an income during sickness as defined by the policy. •Dread disease cover contract pay out a lump sum on the diagnosis of any of a number of a specific disease.
