1. Introduction to Health Insurance

2. What Is Risk? Life has many uncertainties that result in financial loss and unhappiness- for example, loss of a job, of one's possessions, of health, and of life. Voluntarily purchased insurance increases individual welfare because it creates less uncertainty and concern about financial losses that may accompany these types of adverse, and unpredictable, future events.

3. Illness and Insurance Illness is a major loss which affects physical wellbeing and strikes randomly with large impact on earning potential Insurance is a response to uncertainty - The wish to reserve a benefit to compensate in the event of future loss.

4. Why Insurance? Illness - Rare and Random Health Care Expenses - Uncertain Costs - May be prohibitive

5. Risk Aversion About Health Problems Most people are risk averse about their health problems Club type approach is the dominant approach in most of private health insurances

6. Why Insurance Increase Welfare 1.Insurance buys financial security and peace of mind before such events occur. 2.It also reduces the financial burden associated with an adverse event if it does come about, although it cannot, of course, restore to the individual exactly what has been lost.

7. Different Kinds of Risks Risk is defined as uncertainty about the outcome of a future event. Uncertainty is present in a speculative or a pure risk.

8. Speculative Risk Speculative risk is uncertainty surrounding a chance event that can result in a gain or a loss. For example, the owners of stock are exposed to speculative risk; stockholders can lose part or all of their investment or receive more than the original amount invested.

9. Pure Risk With pure risks, uncertainty involves the outcome of a chance event that results only in a loss. The question is how big or small the loss will be. The uncertainty of future medical expenses associated with an unpredictable poor health state or loss of family income from premature death of a wage earner reflects pure risk because no possible gain arises from these chance occurrences

10. Definition Health insurance –Institutional arrangement allowing consumers to make relatively small regular payments into a pool used to pay for health care services –Allows consumers to manage the financial risk of ill health –Is not, strictly speaking, a method to mobilize resources

11. Insurance Logic The consumer pays insurer a premium to cover medical expenses in coming year. –For any one consumer, the premium will be higher or lower than medical expenses. But the insurer can pool or spread risk among many insurees. èThe sum of premiums will exceed the sum of medical expenses.

12. Expected value of decision tree U1 U3 p4 p3 U2 U4 p1 p2

13. Averaging Out U1 U3 p4 p3 P1U1 + P2U2 U2 U4 p1 p2 P3U3 + P4U4

14. Folding Back P1U1 + P2U2 P3U3 + P4U4

15. Expected value of decision tree D 10,000 1,000,000 0.99 0.01 H H D 10,000 0 0.01 0.99 Insured Uninsured 10,000 Rls

16. Averaging Out 10,000 1,000,000 0.99 0.01 P1U1 + P2U2 10,000 0 0.01 0.99 P3U3 + P4U4

17. Folding Back 10,000

18. Risk vs. Uncertainty Risk is imperfect knowledge where the probabilities of outcomes are known. Uncertainty is imperfect knowledge where the probabilities of outcomes are also unknown.

19. Thank You ! Any Question ?