Question

A group of 10 people seek out an insurance company to underwrite health insurance for its members. The expected medical spending for this group is $50,000, or 5,000 per person on the average. The insurance company computes a premium for this group. An additional 10 people join the group who have expected medical spending of $10,000 per person on average. If the insurance company assumes that the additional 10 people added to the original insured group of 10 have the same expected medical spending as the original group of 10, and therefore should be charged the same premium as computed for the group of 10, the principle of __________ has been illustrated.

a. moral hazard b. coinsurance c. adverse selection d. cream skimming e. none of the above.

Answer 1

Right Answer: (C)

Since here high risky members are being added and insurance company will not be able to differentiate and all are being charged same premium. Thus, risk factor of insurance company has increased significantly.