Question

Consider private insurer profit function- what are the revenes and costs of the insurance firm (imagine that insurance may have investment revenue too)? Based on your definition on total revenues and total costs, please analyze the effects of the following exogeneous changes on the imsurer's profit:

a) increase in interest rates

b) a general increase in health care expenditures

c) an increase in population size

d) an increase in the country's unemployment rate

Answer 1

a) an increase in interest rates will lead to increased costs to an insurer, because of the following reasons

1- the increased cost of capital for any external debt

2- increased expectations of insured parties, as they can get an increased interest if they decide to invest their money somewhere else.

b) The increased cost of healthcare can be offset by increasing insurance premiums, but in any case, the total expenditure of insurance claims will rise.

c) An increase in population size should not greatly influence an insurer's profits, as his base for insured people will also increase, leading to increased revenues, and considering the claims also rise in tandem.

d) one of the considerate amounts of insurance comes from "corporate insurance" offered by employers. If the rate of unemployment increases, there will be a lesser amount of people covered in this corporate insurance, decreasing the number of premiums paid by these corporate to the insurer. Hence it will decrease the revenue of the insurer