Each group acts as an insurance company. You are required to offer an insurance policy to our entire current Health Economics class that insures against a student either getting a grade of ‘C’ or lower (including ‘I’ turning into ‘F’) or withdrawing from the class towards the end of the semester. If either of those happen to a policy holder, you are required to pay that policy holder. You are NOT trying to make a profit, but what is important is that your group try its very best to avoid making a loss.
Assume that there are no other costs associated with your business other than paying policy holders who make ‘C’ or less or withdraw. Four different scenarios are offered below. Here’s what you need to tell me for each (I would also like each group to orally present results to rest of class, don’t need any more than 3 minutes): ? What is the premium that students will have to pay for the policy in this scenario? ? A brief justification for the premium (a couple of sentence is good enough.
You can give me the math formula you used too – but don’t JUST give me a math formula! ). ? A final couple of sentence (optional) if you believe that I have given you a situation where it is impossible to avoid making a loss, and why you think that. If you believe this, you may choose not to sell any policies under that scenario. In all cases, there are a total of 30 students who are your potential customers – i. e. insurance policy buyers. Scenario I: You will be paying students who make ‘C’ or less or withdraw the amount of $5000. I can give you this information
– that when I teach the regular Master’s level version of the class, approximately 10%-15% of all students make C or less, Incomplete that becomes F, or withdraw. Also, I will impose an individual mandate on the class, so that once you do offer the policy, every one of the 30 students will be required to buy this policy (but you only want to break even, no profits). What premium will you charge? Please note, in all scenarios you can only charge ONE premium to all customers, no variations allowed.
Scenario II: All conditions in the above scenario hold (# of students, what you pay for C or less or withdraw, the individual mandate). However, one more thing is added. Students who get C or less or withdraw can then get tutoring to prepare them for retaking the class later. The tutoring costs $16 an hour, and the insurance policy now also has to pay 50% of each hour of tutoring (i. e. $8 per hour) up to a maximum of 40 hours. This is a new scheme, so I cannot tell you how many students have previously used such tutoring or for how many hours.
Scenario III: Go back to Scenario 1 (so no tutoring) – except the following changes: the individual mandate is gone. So now you will offer the policy, but students choose whether or not to buy it (btw, you have to offer the policy with a premium attached, you cannot tweak it after seeing actual number of buyers). If they buy it – you are obliged to pay in case of C or less or withdraw. However, here is what you are allowed to do — you can set up to 2 condition under which you will refuse to sell the policy to a particular student (yes, you can access their academic history).
So for this scenario – state what conditions you would use to refuse to sell policies, and what premium you would charge for the policies you DO sell. Don’t forget that you have to give a short justification for your decision. Scenario IV: Like Scenario 3 – there is no individual mandate compelling students to buy the policy.
But now you cannot refuse any student who DOES want to buy the policy. So now set a premium at which you will sell the policy to all students who choose to buy it. You still owe $5000 to all students who get C or below or withdraw.