ASSIGNMENT 2
MBC8
HEALTH INSURANCE
Submitted to: Dr. Soumitra Ghosh
Centre for Health Policy Planning and Management,
School of Health Systems Studies, TISS, Mumbai.
Submitted by:
Pallavi Muraleedharan
Enrollment Number: M2015HE018
Master of Health Administration (2015-17)
Tata Institute of Social Sciences, Mumbai
Date: 01/08/2016
Review the basic assumptions of the Rothschild-Stiglitz model before answering these questions. Indicate whether the statement is true or false and justify your answer. Be sure to state any additional assumptions you may need:
1. In a Rothschild-Stiglitz model with asymmetric information and heterogeneous risk types, the frail population would be worse off if insurance companies were suddenly able to distinguish …show more content…
The Rothschild-Stiglitz model predicts that people who own life insurance should have fewer unobserved traits (that is, unobserved by insurance companies) that lead to a higher risk of death when compared against people with same level of income but who do not own life insurance.
A. FALSE. People with life insurance is expected to have more unobserved risk factors, since it is because they have more risk factors and thus have more risk that they opt for a life insurance.
3. In a Rothschild-Stiglitz model separating equilibrium, there is a volume discount for insurance purchases-those who choose to buy more insurance pay a lower per unit price for it.
A. FALSE. The insurance companies are suspicious about people who want a large insurance because then the company will assume that they are high risk and charge them higher premium.
4. In a Rothschild-Stiglitz model separating equilibrium, low risk consumers of insurance are quantity constrained. They can not buy as much insurance as they want because insurance company is worried it will lose money on them.
A. TRUE. The healthy or low risk individuals cannot buy as much insurance as they want although they would prefer having a full and fair insurance. However they are given only the option of either an actuarially unfair full insurance or a partial but fair …show more content…
A pooling equilibrium can exist if the contract being offered lies on the same indifference curve as the endowment point of the robust population.
A. FALSE. Pooling equilibrium is a contract that attracts both the robust and frail customers and simultaneously satisfies the equilibrium conditions. There exists a contract which can be offered that will attract the robust population away from the pooled equilibrium, which means, a pooling equilibrium will never exist unless it is mandated.
8. Under the typical assumptions of the Rothschild-Stiglitz model, there is nothing that an insurance company can do to distinguish between robust and frail customers.
A. FALSE. The statement is false because if a firm offers a generous insurance which lies below the robust person’s indifference curve through their endowment point, he or she will not choose it. Thus the insurance company can indirectly understand who the robust and frail customers are. Thus the statement given above is false.
9. Private markets are powerless to combat adverse selection, so the only solution is government mandated insurance contract.
A. FALSE. The statement is false because if differences in health emerge only much later in life, then there are ways to design private insurance contracts that would eliminate adverse
MBC8
HEALTH INSURANCE
Submitted to: Dr. Soumitra Ghosh
Centre for Health Policy Planning and Management,
School of Health Systems Studies, TISS, Mumbai.
Submitted by:
Pallavi Muraleedharan
Enrollment Number: M2015HE018
Master of Health Administration (2015-17)
Tata Institute of Social Sciences, Mumbai
Date: 01/08/2016
Review the basic assumptions of the Rothschild-Stiglitz model before answering these questions. Indicate whether the statement is true or false and justify your answer. Be sure to state any additional assumptions you may need:
1. In a Rothschild-Stiglitz model with asymmetric information and heterogeneous risk types, the frail population would be worse off if insurance companies were suddenly able to distinguish …show more content…
The Rothschild-Stiglitz model predicts that people who own life insurance should have fewer unobserved traits (that is, unobserved by insurance companies) that lead to a higher risk of death when compared against people with same level of income but who do not own life insurance.
A. FALSE. People with life insurance is expected to have more unobserved risk factors, since it is because they have more risk factors and thus have more risk that they opt for a life insurance.
3. In a Rothschild-Stiglitz model separating equilibrium, there is a volume discount for insurance purchases-those who choose to buy more insurance pay a lower per unit price for it.
A. FALSE. The insurance companies are suspicious about people who want a large insurance because then the company will assume that they are high risk and charge them higher premium.
4. In a Rothschild-Stiglitz model separating equilibrium, low risk consumers of insurance are quantity constrained. They can not buy as much insurance as they want because insurance company is worried it will lose money on them.
A. TRUE. The healthy or low risk individuals cannot buy as much insurance as they want although they would prefer having a full and fair insurance. However they are given only the option of either an actuarially unfair full insurance or a partial but fair …show more content…
A pooling equilibrium can exist if the contract being offered lies on the same indifference curve as the endowment point of the robust population.
A. FALSE. Pooling equilibrium is a contract that attracts both the robust and frail customers and simultaneously satisfies the equilibrium conditions. There exists a contract which can be offered that will attract the robust population away from the pooled equilibrium, which means, a pooling equilibrium will never exist unless it is mandated.
8. Under the typical assumptions of the Rothschild-Stiglitz model, there is nothing that an insurance company can do to distinguish between robust and frail customers.
A. FALSE. The statement is false because if a firm offers a generous insurance which lies below the robust person’s indifference curve through their endowment point, he or she will not choose it. Thus the insurance company can indirectly understand who the robust and frail customers are. Thus the statement given above is false.
9. Private markets are powerless to combat adverse selection, so the only solution is government mandated insurance contract.
A. FALSE. The statement is false because if differences in health emerge only much later in life, then there are ways to design private insurance contracts that would eliminate adverse