Assignment

Assignment

Assignment

1.1

P (individuals who own cars being victim of vehicle related theft| the individuals is un employed)= 9.6%= 0.96

P (individuals who own cars being victim of vehicle related theft | the individual lives in a young house hold)= 0.094

P (individuals who own cars being victim of vehicle related theft |the individuals is a manager or professional)= 1/15 th =0.06

P (individuals who own cars being victim of vehicle related theft |the individuals owns his house) = 1 in 7= 1/7=01428

1.2

P(chance of having vehicle related theft and being burgled)= P(chance of having vehicle related theft)*p(being burgled)

P(the individual lives in a young house hold)=.007

P(the individuals owns his house)=0.001

P(the individuals is un employed)=0.006

P(the individuals is a manager or professional)=0.001

1.3

Moral hazard is defined as the “effect of insurance coverage on individuals' decisions to undertake activities that may change the likelihood of incurring losses” (Nicholson: 1998). The concept of moral hazard was first defined by the French economist Drèze in 1961 (Mooney 1994: 135), but is also referred to by some economists such as Arrow (1985) as hidden action, for the reason that 'moral hazard' frequently implies a moral failure on the part of individuals, a connotation which is not intended1. The term 'moral hazard' can be further defined.

Firstly, moral hazard can be divided into producer moral hazard and consumer moral hazard. The former occurs, for example, when doctors work under a regime of fee-for-service (FFS) remuneration. Under FFS, doctors receive a fee for services provided to patients, such as a surgeon being paid for an operation and a radiologist for a mammogram. There is therefore a financial incentive for doctors to provide quantities of care in excess of the quantities that patients would choose to receive were they fully informed.

Producer moral hazard is also known as supplierinduced demand (SID). Consumer moral hazard, which is the most characterised form of moral hazard, is manifested when an individual - due to the fact that he is insured - demands more medical services than he would if he was to pay for those services himself. Again, one can classify consumer moral hazard into further entities. Ehrlich and Becker (1972)2 made the distinction between ex ante and ex post moral hazard. The former arises prior to sickness, in the healthy state. Assuming that individuals can reduce the probability of falling ill through preventive measures, it can be postulated that insurance coverage (which lowers the cost of treatment at the point of consumption) renders being ill a less undesirable state, thereby weakening individuals' incentives to avoid the sick state.

1.4

To protect themselves from consumer moral hazard, car insurance companies can increase premiums for all their customers, that is, customers must pay part of their costs by out-of-pocket payments. The main forms of these payments are copayments, fixed period per-capita payments and fixed indemnities. In a copayment scheme, the insured pays a proportion of the medical charges.

1.5

Many consumers these days are opting to purchase used cars instead of buying brand new ...