Consider a simplified example in which all
7
0
,
0
0
0
residents in a particular town pay $
1
0
0
a month to the insurance company SecureSure for medical
insurance coverage. The insurance company cannot predict whether a given resident will need hospitalization or how much any individual's care will
cost
.
Suppose, however, it has data that on average,
1
0
%
of the citizens require care each month, costing an average of $
1
,
0
0
0
each. The expected
average cost of monthly care will be $
per person. If the insurance company sets the monthly
equal to this amount,
it would break even
(
on average
)
.
In reality, the rates that an individual pays each month vary based on a process known as
,
in which the insureds are
divided into four insurance classes. The class, which is based on an insured person's loss expectancy grad, determines the amount he or she pays.
Consider the following example:
An Insurance Policy in Action
Shen is a
6
5
-
year
-
old man who recently experienced what he thought were stroke
-
like symptoms and went to the emergency room at a nearby
hospital. Although it turned out to be a severe case of heartburn, not a stroke, his medical bill for the hospitalization and tests totaled $
4
,
5
8
3
.
Shen
has an insurance policy with a $
1
0
0
hospital stay deductible and a coinsurance rate of
2
0
%
.
He 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.
Shen's age and history of heart attacks increase his chances of suffering an insurable loss. This is an example of
Shen cannot receive more than $
4
,
5
8
3
in reimbursement from his insurance company. This reflects the
Because Shen is older and has a history of heart attacks, he is a part of the
class of insured.