Assume a pool of 115 people in an insurance pool (a group of people insured through community rating). It is estimated that a small number in the pool will have significant pre-existing conditions as indicated in the table.
Based on the age of these 115 people, the insurance company estimates the following distribution of health care claims (which includes necessary profit and administrative costs of the insurance company).
Number of insured Anticipated Health costs/year/person
5 $1400
5 1500
5 1600
5 1700
5 1800
5 1900
5 2000
5 2100
5 2200
5 2300
5 2400
5 2500
5 2600
5 2700
5 2800
5 2900
5 3000
5 3100
5 3200
5 3300
5 4000
5 7000
5 10,000
1. Determine what would happen in the first three years if there were a penalty of $500 for not having insurance.
2. What will be the general effect if the insurance company uses a ratio of 3:1 based on age where the oldest insured pay three times as much as the youngest? How would this affect participation in the insurance pool?