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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

An insurer wants to curb unnecessary hospital treatment and reduce moral hazard in its group health portfolio without withdrawing cover. Which measure most directly addresses moral hazard?

Co-payments and deductibles most directly address moral hazard because policyholders bear part of each claim, discouraging unnecessary treatment. Higher sums insured, bigger commissions or broader pooling do not change insureds' incentives when claiming.

  1. AIncreasing the sum insured limits across all plans
  2. BIntroducing co-payment and deductibles so insureds share part of each claimCorrect
  3. CExtending the waiting period for the policy's renewal
  4. DRaising the commission paid to intermediaries
  5. Pooling more lives into the same premium band

Explanation

Co-payments and deductibles give insureds a financial stake in each claim, reducing over-use of services. Higher limits or commission do not reduce moral hazard, and pooling more lives addresses averaging, not behaviour.

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