Economics 365 (S19)
Assignment 6: I’d Love to Sell You That Policy, But... Risk and Car Insurance Options
An 18-year-old driver is looking to buy car insurance. Unlike many of his friends, he has a spotless driving record. No accidents ever!
He does some investigating and finds a policy with low monthly premiums but a sizable deductible. If he filed a claim, he would be responsible for the first $200 worth of damage before the insurance company would make any payment.
He contacts the insurance agency to see if they offer a policy with low monthly premiums and no deductibles.
“No, not for your age group”, the agent tells him. “Young drivers are less experienced and at greater risk for accidents.”
The agent tells him that if he wants to avoid deductibles, he will have to choose a policy with a higher monthly premium.
Our driver must choose between
A policy with a high monthly premium but no deductibles
A policy with a low monthly premium but a sizable deductible
He asks you for advice and you send him a note explaining these policy options. Be sure you explain
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· the problem the insurance company faces when looking at our driver
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· why the ‘no deductible’ policy comes with high premiums
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· why the low premium policy requires a large deductible
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· Which policy would you recommend? Length: 1-2 pages
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