Insurance Overview Flashcards
Insurance
an agreement/contract between two parties that deals with adverse events
adverse event
a bad thing that has some chance of happening
insurer
the party that provides the insurance
insured
the party that buys the insurance
the 2 components of insurance contracts
1) insured party makes a payment (a premium) to the insurer
2) insurer gives a benefit to the insured if an adverse event occurs
insurance can be provided
by either the private sector or the gov
Retirement & Disability Insurance
– run by the Social Security Administration
– Workers pay into the programs via taxes during their working years
– Receive benefits when they retire or become disabled
social insurance
insurance that’s heavily influenced by the gov
social insurance comes in two forms
1) directly provided by the gov
2) provided by private firms under strict gov. regulation
Healthcare insurance types
– Medicaid: gov.-provided health insurance for children & the poor
– Medicare: gov.-provided health insurance for the elderly
– Obamacare: regulatory framework for private health insurance
Unemployment Insurance
– run at the state level
– Workers pay in via taxes when they work
– Receive benefits if they lose their jobs
three categories of social insurance programs
healthcare, retirement & disability, and unemployment
Social insurance has ______ ____ over time
grown substantially (is now one of the core functions of the federal gov)
Why do people value insurance?
it reduces the damage from adverse events
What insurance does
lets people redistribute resources across states of the world (transfer from the good state to the bad state)
main advantage of insurance
allows for consumption smoothing
- consuming similar amounts regardless of state
- give up some consumption in the good state via premiums to be able to maintain their consumption in the bad state
bad state
an adverse event occurs, p
- Consumption = W - m * b - delta +b
good state
the adverse event does not occur, 1-p
- Consumption = W (income) - m (dollars per dollar of coverage) * b (insurance)
p
the fixed probability that the adverse event occurs/ the probability of the good state
Expected Utility
the expected value of a person’s utility across states of the world – the utility that the person expects to obtain before she knows which state will occur
EU mathematically is
– weighted average of a person’s utility in each state, where the weights depend on the probabilities of the states
– EU = Pr(good state) * U(good state) + Pr(bad state) * U (bad state)
Expected Utility Model
a model that deals with decision-making under uncertainty
– the framework that economists use to model how people make decisions when they don’t know which state will occur
the model makes a major claim
– In situations of uncertainty, people maximize their expected utility
– Choose the option that gives the highest average utility over all states
Risk Aversion
the idea that people don’t like uncertainty
→ prefer a sure thing to an uncertain outcome with the same expected payout
