Social Insurance

Question 1

Insurance

Answer 1

payment of a premium to get payment in case of an adverse event

Question 2

Social insurance programs definition

Answer 2

government provided insurance against adverse events funded by taxation

Question 3

social insurance programs examples

Answer 3

health insurance (medicare)
retirement and disability insurance (pension, NDIS)
unemployment insurance (jobseeker)

Question 4

expected profits of insurers

Answer 4

m.b - p.b

Question 5

actuarially fair insurance

Answer 5

m=p (epi =0)

Question 6

scenario with symmetric information

Answer 6

insurance companies and individuals can observe pH v pS types, and the insurance companies will charge 2 policies, each actuarially fair

Question 7

adverse selection

Answer 7

when individuals know more about their risk level than the insurer and hence individuals with higher risk are more likely to purchase insurance

given asymmetric information, everyone wants to buy the healthy insurance which is cheaper, so the insurance company will make a loss

Question 7

scenario with asymmetric information

Answer 7

insurance companies cannot observe pH vs pS types but individuals do

Question 8

pooling equilibrium

Answer 8

insurance companies offer a contract based on average risk (good deal for sickly, mediocre deal for healthy, but better than no insurance

Question 9

separating equilibrium

Answer 9

insurance companies offer two contracts: one expensive contract with full insurance for the sickly, one cheap contract with partial insurance for the healthy: each type self-selects into its contract - outcome not as efficient as healthy under-insured

Question 10

death spiral

Answer 10

insurance is offered at average fair price, bad deal for low risk people and hence only high risk people buy it –> insurers make losses –> insurers raise the price further –> only very high risk people buy it

Question 11

solutions for adverse selection

Answer 11

government can redistribute - natural solution is mandate which requires everyone to purchase insurance

Question 12

reasons for social insurance

Answer 12

health care is a right
redistribution - society may want to compensate high risk people as this is not their fault
externalities
individual failures
administrative costs

Question 13

moral hazard

Answer 13

adverse actions taken by insured individuals in response to insurance against adverse outcomes

Question 14

central trade-off of social insurance

Answer 14

insurance is desirable for consumption smoothing but insurance can create moral hazard

Question 15

what determines moral hazard

Answer 15

how hard it is to observe whether the adverse event has happened
how easy it is to change behaviour in to get into or stay in the adverse event

Question 16

three important types of moral hazard

Answer 16

reduced precaution against entering the adverse state
increased odds of staying in the adverse state
increased expenditures when in the adverse state

Question 17

two considerations for optimal social insurance trade-off

Answer 17

the benefit of social insurance is the amount of consumption smoothing provided by social insurance programs

the cost of social insurance is the moral hazard caused by insuring against adverse events

Question 18

ironic feature of asymmetric information

Answer 18

it simultaneously motivates and undercuts the rationale for government intervention through social insurance