Insurance

Question 1

Social Insurance is…

Answer 1

the one provided by public organisations which is compulsory for everyone

Question 2

Private Insurance is…

Answer 2

insurance provided by private companies which is not compulsory for individuals

Question 3

How do insurances calculate premiums?

Answer 3

total value of insurance /
total number of insurance holders

Question 4

Actuarial Insurance…

Answer 4

is the price of insurance (premiums) reflecting the expected risks

Question 5

How is actuarial insurance calculated?

Answer 5

Premium = Probability of loss x Value of insured

Question 6

Adverse Selection

Answer 6

hidden information before engaging with the insurance company

Question 7

Adverse Selection & profile risks

Answer 7

high profile risks will pay a lower premium than those with lower risks.

low risk profile will go out the market (no insurance) leading a high risk group in the market

Question 8

solutions for adverse selection

Answer 8

cream skimming, however, because people are chosen it will lead to a reduced group and an inefficient social optimum

Question 9

Moral Hazard

Answer 9

hidden information after engaging with the insurance company

Question 10

moral hazard challenges insurance companies face

Answer 10

little information and trust on the insured thus difficult to determine how the accident happened

Question 11

solutions for moral hazard (3)

Answer 11

1. maximum period of insurance
2. increasing premium after the accident
3. insured having to cover a part of the accident

Question 12

why moral hazard & adverse selection happen?

Answer 12

due to information asymmetries.
leads to underprovided insurance

Question 13

what does it mean to have a market of lemons?

Answer 13

it means to have an unobservable quality of what is happening and thus a fake reality (adverse selection situations; better than it seems)

Question 14

market insurance failures due to (4)

Answer 14

1. information asymmetries (moral hazard & adverse selection)
2. bounded rationality (inadequate demand for insurance)
3. bounded willpower (insufficient demand for insurance)
4. calculating premiums (independent risks & (un)certainties)
   1&4 happen because insurance markets aren’t properly provided, missing

Question 15

what is risk solidarity in the insurance market?

Answer 15

it aims to break the link between profiles and risks thus making the insurance market more efficient and equitable by redistributing risks collectively

Question 16

if all conditions of 1st best world would be fulfilled, actuarial insurance would reflect…

Answer 16

all individuals’ premium risks

Question 17

how does social insurance divert from actuarial/market-based insurance? (2)

Answer 17

1. Making insurance compulsory: to prevent low-risk profiles from exiting the market
2. Decoupling risk profile and the risk premium

Question 18

how do states intervene in the insurance market? (2)

Answer 18

1. by regulating private insurers
2. providing public insurance

Question 19

Case Study 1
Unemployment insurance
What is it?

Answer 19

the type of insurance that provides you with money when you are unemployed.
(the person has to make regular contributions to benefit from the money)

Question 20

Case Study 1
Unemployment Insurance
Technical Conditions (2)
(risk failure)

Answer 20

1. Uncertainty: difficult to calculate the probability of being unemployed
2. Risk: despite unemployment being an independent risk it may also be influenced by common risks, especially when there is a recession process

Question 21

Case Study 1
Unemployment Insurance
Information Asymmetry (2)
(risk failure)

Answer 21

1. Adverse Selection: it is difficult for insurers to differentiate the risks (don’t know what the job implies)
2. Moral Hazard: people may be profiting from insurance

Question 22

Case Study 1
Unemployment Insurance
Social Insurance to risk failures (3)

Answer 22

the government intervenes because it is easier to 1. deal with recessions (print more money), 2. redistribute resources and 3. prevent adverse selection (compulsory insurance)

Question 23

Case Study 1
Unemployment Insurance
Unemployment Trap

Answer 23

when the efforts while working are not reflected in the money received while unemployed.

Question 24

Case Study 1
Unemployment Insurance
Incentivising Employment (3)

Answer 24

1. restricting unemployment insurance
2. monitoring unemployment
3. Active Labour Market Policies

Question 25

Case Study 2
Old Age Pensions
what is it?

Answer 25

it protects old people from the risks of outliving their savings, thus, insurances pay old people an annuity each month
(the amount depends on the savings)

Question 26

Case Study 2
Old Age Pensions
Supply Side - insurance failures (2)

Answer 26

1. information asymmetry
2. Uncertainties: annuity changes as the economy does (difficult to predict future economic changes)

Question 27

Case Study 2
Old Age Pensions
Demand Side (3) leading to an inadequate actuarial insurance

Answer 27

1. incomplete information
2. Bounded Rationality: not enough knowledge to choose the good insurance
3. Bounded willpower: people prioritise short-term savings (no savings when they are old)

Question 28

Case Study 2
Old Age Pensions
How to make insurances more adequate for old people?
“Pay as you go”

Answer 28

by making insurances compulsory, thus, converting these into social insurances/public provisions

· current workers paying for pensions (increases efficiency & equity through resource redistribution)

Question 30

Case Study 2
Old Age Pensions
Challenges

Answer 30

· decline between those who need support and those supporting

Question 31

Case Study 2
Old Age Pensions
How to face challenges? (3)

Answer 31

1. increasing individuals’ productivity
2. reforming pensions
3. state intervention (coverage gaps): convince people to save more & regulating private insurances

Question 32

How do we deal with social risks? (4)

Answer 32

1. savings
2. friends/family
3. private insurance
4. social insurance