What conditions must exist in order for companies to issue health insurance?
Certain conditions must exist in order for companies to be able to issue health insurance. First, people must have different preferences for risk. If all people were risk-neutral, then there would be no insurance market. Second, the company-which is risk-neutral-must take in more money in premiums than they pay out in benefits during a given period of time, which could be one year, or an average of several years. If expenditures, prices, or the composition of their risk-pool changes from year to year, they simply shift their premium rates accordingly. Third, risk-pools must be large enough to randomize the chances of large payouts, and to spread risk effectively. Fourth, in nearly all cases an insurance product must have a deductible or a certain amount of “first-dollar” costs that the policyholder must pay in addition to the monthly premiums. If the policyholder were not responsible for any first dollar expenses, then for the price of the total annual premium, the policyholder could c
