An insurance company offers doctors malpractice insurance.
Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000.
Doctors are risk-neutral and know whether they are reckless or careful, but the insurance company only knows that 10% of doctors are reckless.
How much do insurance companies have to charge for malpractice insurance to break even?
A. $5,000
B. $7,500
C. $27,000
D. $30,000
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Home » Business » An insurance company offers doctors malpractice insurance. Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000.