The Coase theorem crudely states that in presence of externalities, if the transaction costs were low, the transaction would be efficient, irrespective of how the costs are allocated. However, this is rarely the case in the real world. Hence, it is best to compare the costs in each possible scenario and then allocate the costs.
In this case, since the claims adjustors’ overhead costs are in the end reimbursed by the employer, the claims adjustors do not have an incentive to handle claims efficiently. Rather, in absence of inefficient information flow or transparency, the claims adjustor has an incentive to overstate the overheads. In case the insurer’s management wants to minimize the total claims handling cost, it will definitely focus on lowering the claims adjustors’ overheads and handling the claims more efficiently. However, from the costing point of view, the insurer’s management will prefer having the overhead costs to be collected as a reimbursement rather than be included in the premium. This is for two reasons. First is the cost quoted to the employer will be that of the premium and not the overheads. Hence, the insurer will collect the hidden cost of overheads in the later stage but the pricing of the insurance in terms of premium will appear to be more attractive and competitive. The second reason being, the cost of insurance, also called as premium, can be calculated more accurately based on actuarial studies. The overheads cannot calculated as accurately for an individual employer (insured party). Hence, the insurer has a chance of over or under quoting the premium. This will decrease the competitive pricing advantage or overall profit of the insurer, respectively. The insured or the employer will also like the overheads to be billed separately and not included in the premium. This way, it will have a more equitable basis for comparing the premium quotes and also have a supposedly close monitoring on the overheads costs.
The insurer does not bear the cost of insurance payment ultimately. It is reimbursed from the employer for the claims. On the other hand, the cost of investigation has to be borne by the insurer. Hence, there is no incentive for the insurer to conduct the investigation, at least in short run. In the long run, weather to conduct investigations will depend on the expected number of suspicious claims and the cost of investigating each claim. Based on the given data, the insurer will prefer adding an extra $100k in the premium and investigate some of the claims, not more than 10 in a year. However, from the competitiveness perspective, the insurer’s management does not have an incentive to investigate any claim, as they do not bear the cost of claim. Adding an additional charge of $100k for investigations will only decrease their competitive advantage. On the other hand, the insured or the employer will prefer the investigations to happen in the long run, even if the premium increases. In the long run, the number of claims will go down as a possibility of investigation will deter employees from claiming a dubious claim. This is an -indirect benefit, even in absence of thorough investigations from the insurer.
Suppose a large employer contrads with an insurer to provide health insurance coverage or workers compensation...
DEX, Inc. has flucuating inventory levels. It has opted to provide its insurer with a monthly value reporting form to document its monthly inventory values for premium calculation purposes. Assume for its last report DEX purposely underreported its inventory values as $75,000 instead of the true $100,000 so that it would have a smaller premium payment at the end of the year. One week after submitting its report, DEX suffered a fire loss to its inventory valued at $20,000. This...
16 Basics of Health Insurance VOCABULARY REVIEW de blanks with the corecr vewcubulary terns from this chopte hi phsomeric number isued by the insurance compuny giving approval of a procedure or service is ai : The The amsunt pagable by an insaurane conpany for a monetary loss to an inrvidual insuned by tha for a monetary loss to an individual insured by that company cash coverage. is known as be-0643 , In the United States beultheare practitioners rendr services bieft...
Insurance coverage relies on 1. the law of large numbers, meaning Events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals b. Events that are statistically difficult to predict for a large number of individuals a. predictable are more individual. for an Insurers can statistically predict whether an individual will suffer a loss more accurately than they statistically predict whether a large number of individuals will suffer losses. d. C....
7) Which of the following statements is true of insurance? A) It has to be paid after the risk has been encountered. B) It can be obtained even if one has no insurable interest in the property being insured. C) It is a means of transferring and distributing the risk of loss. D) It cannot be modified once issued. 8) The ________ is a duty of the insurer to protect the insured against lawsuits or legal proceedings that involve a...
Question 1 BWS Corporation pays the premiums on an $80,000 group-term life insurance policy on the life of its 45-year-old vice-president, Warren. The annual cost per $1,000 of coverage for a person aged 45 to 49 is $1.80. If Warren has paid $25 toward the cost of the insurance, what is the cost of hte policy includible in Warren's gross income? 1) $278.00 2) $144.00 3) $54.00 4) $29.00 5) $0 Question 2 During 2019, Edward East had wages of...
A homeowners' policy will typically pay up to $500 per plant that is damaged by a covered peril. This is an example of: an aggregate dollar limit an open perils dollar limit C. a specific dollar limit a mixed dollar limit none of the above e. You purchase an annuity for which you will make one payment of $15,000 on your 50 birthday. The annuity will start paying you $400 a month on your 67" birthday until you die. What...
38) - JULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the quest 38) An individual who purchases an insurance policy is called A) The insurance company. B) A policyholder. C) A victim. D) An employer. E) An insurer. 39) 39) What is the fee that a policyholder pays when an insurance company agrees to take on the risk? A) Coverage B) Insured C) Peril D) Risk E) Premium 40) 40) The most common risks are...
1. The patient's health insurance plan has a $750 deductible for hospital visits, and then it covers 100 percent of hospital visit charges. The patient's first hospital visit this year had charges of $612. The patient was subsequently admitted to the hospital a second time this year, and the charges totaled $358. How much will the patient be billed for each visit? How much will the health insurance plan reimburse for each visit?2 A patient insured under an indemnity plan...
Insurance companies collect annual payments from homeowners in exchange for paying to rebuild houses that burn down. a) Why should one be reluctant to accept a $300 payment from one's neighbor to replace his house should it burn down during the coming year? b) Why can an insurance company make that offer? a) Choose the correct answer below. O A. It would be foolish to insure one's neighbor's house for $300 because although one would probably collect $300, there is...
Dow, 42, is a manager for Winter Company. In addition to his $82,000 salary, he receives the following benefits from Winter during the current year: . Winter pays all its employees' health and accident insurance. Premiums paid by Winter for Dow's health insurance are $1,200. Winter provides all employees with group term life insurance coverage equal to their annual salary. Premiums on Dow's $82,000 in coverage are $820. (See Table 4- 1 IRS Premium Table above) Winter has a flexible...