How Does Insurance Help People Smooth Consumption
Chapter 12
2. What is consumption smoothing? How does insurance help people smooth consumption?
When consumption goes from a period of high consumption to a period of low consumption. For example, if a person does not save money at all while they work in order to live a high maintenance lifestyle then they suddenly get laid off, they must greatly reduce their consumption because they can no longer support their lifestyle. Insurance helps people smooth consumption because it helps them defend against unexpected events. If a person did not have insurance and broke all four of their limbs but did not have sufficient funds to pay for their medical bills, they would have to lower their consumption until they paid their medical bills. A person with …show more content…
First is people with insurance are less careful with their behavior because they know they are covered by insurance so they will not have to cover the entirety of costs of the consequences. To combat this, a more restrictive policy when accepting claims should be used. The fact that not all claims will be automatically accepted would provide as an incentive to be more careful.
Next, people who are insured to not take into consider cost effective strategies because they are not paying for the repairs. To combat this, the provider should have fixed prices for specific situations in a tiered system and not cover anything and everything.
Lastly, whoever is contracted with fixing whatever issue the insuree has is not concerned with price because they know the insuree is not having to pay for it all. This makes it easy to add premium and excessive services to drive up the price and have the insurance pay for the additional and unnecessary service.
12. There are two types of drivers on the road today. Speed Racers have a 5% chance of causing an accident per year, while Low Riders have a 1% chance of causing an accident per year. There is the same number of Speed Racers as there are Low Riders. The cost of an accident is
2. What is consumption smoothing? How does insurance help people smooth consumption?
When consumption goes from a period of high consumption to a period of low consumption. For example, if a person does not save money at all while they work in order to live a high maintenance lifestyle then they suddenly get laid off, they must greatly reduce their consumption because they can no longer support their lifestyle. Insurance helps people smooth consumption because it helps them defend against unexpected events. If a person did not have insurance and broke all four of their limbs but did not have sufficient funds to pay for their medical bills, they would have to lower their consumption until they paid their medical bills. A person with …show more content…
First is people with insurance are less careful with their behavior because they know they are covered by insurance so they will not have to cover the entirety of costs of the consequences. To combat this, a more restrictive policy when accepting claims should be used. The fact that not all claims will be automatically accepted would provide as an incentive to be more careful.
Next, people who are insured to not take into consider cost effective strategies because they are not paying for the repairs. To combat this, the provider should have fixed prices for specific situations in a tiered system and not cover anything and everything.
Lastly, whoever is contracted with fixing whatever issue the insuree has is not concerned with price because they know the insuree is not having to pay for it all. This makes it easy to add premium and excessive services to drive up the price and have the insurance pay for the additional and unnecessary service.
12. There are two types of drivers on the road today. Speed Racers have a 5% chance of causing an accident per year, while Low Riders have a 1% chance of causing an accident per year. There is the same number of Speed Racers as there are Low Riders. The cost of an accident is