Health Sciences 3840B Lecture Notes - Lecture 7: Risk Premium, Risk Pool, Risk Aversion
30 May 2018
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Can’t share health risks but can share financial risks that are associated with health outcomes
2. Could there be something that causes everyone to miss class
The more independent it is the better you can pool risks vs. something that affects everyone (drought)
3. If once you have insurance you’re going to become more careless, risk pooling is less effective because it causes a behavioural response
If you share notes, and then it makes you decide that you don’t need to go to class, the size of the loss is bigger because you have a risk pool of people
If people aren’t going to make any decisions differently then it is good for the risk pool
People have diff preferences over facing uncertain situations
Compare 2 outcomes: getting $5 for sure, or $0 with a probability of 50% and $10 with a probability of 50%
What is the expected value you’ll get if you pick the uncertain outcome? $5
Risk preferences only relevant when thinking about uncertain outcomes
If there is 50% of each choice, take the average of the two values = expected value
If you are risk averse your utility function is the opposite of risk loving
All increase, individuals are happier when they have more money
Individuals have different preferences when facing risk
If you prefer the certain outcome even with a probability of $1000 higher, points will be above the risk neutral line –risk aversion
If you prefer the risky option you are risk loving, point are below risk neutral line
1. You’re going to be willing to pay up to until it’s not worth it anymore, up to expected value of insurance
You might as well not get insurance if you’re the only one
Uncertain –it covers the full amount of losses for a few individuals, but it banks on the fact that not everybody will face negative health outcomes. *False, even full
insurance can only cover the financial losses (not health losses for example).
False, it only depends on the probability of negative health outcomes and the amount of money they cost. Risk preferences affect how much individuals are willing
to pay for insurance, but does not affect the actuarially fair risk premium. Only depends on the expected loss.
False –they have to charge more because of administrative costs. Loading costs
True **False, consider a certain and bad outcome versus uncertainty between two good outcomes.
True **False, health insurance is not providing health status, it is protecting against financial losses associated with health losses
False –increasing marginal utility of wealthy implies a risk loving individual. With a greater probability of wealth, you will want to take the risk for that wealth more.
True **False, if they have the same expected value this would be true, but similar to d) it depends on the options.
Lec 7 Risk and Insurance
May 6, 2018
3:49 PM
Health Economics Page 1
