According to the CDC, a woman’s risk for breast cancer is hi…
According to the CDC, a woman’s risk for breast cancer is higher if she has a mother, sister, or daughter (first-degree relative) or multiple family members on either her mother’s or father’s side of the family who have had breast or ovarian cancer. Suppose you could divide middle-aged women (with 30-50 years old) into two groups: those who have a family history of breast or ovarian cancer and those who do not. For the purposes of this example, say that 20% of a group of 100 women have a family history of breast or ovarian cancer, and these people have 1 chance in 33 of dying of cancer next year, while the other 80% of women have 1 chance in 200 of dying in the next year. The insurance company is selling a policy that will pay $150,000 to the estate of anyone who dies in the next year. Now answer the following: If the insurance company were selling life insurance separately to each group, what would be the actuarially fair premium for each group? Show your work! If an insurance company were offering life insurance to the entire group, but could not find out about family cancer histories, what would be the actuarially fair premium for the group as a whole? Show your work! What will happen to the insurance company if it tries to charge the actuarially fair premium to the group as a whole rather than to each group separately? Is this an adverse selection or moral hazard problem? Justify your answer!
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