Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases...

GMAT Critical Reasoning : (CR) Questions

Source: Official Guide

Critical Reasoning

Misc.

MEDIUM

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Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly. Premiums for the policy must be low enough to attract customers. Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.

Which of the following strategies would be most likely to minimize Company X's losses on the policies?

Attracting middle-aged customers unlikely to submit claims for benefits for many years

Insuring only those individuals who did not suffer any serious diseases as children

Including a greater number of services in the policy than are included in other policies of lower cost

Insuring only those individuals who were rejected by other companies for similar policies

Insuring only those individuals who are wealthy enough to pay for the medical services

Solution

Passage Analysis:

Text from Passage	Analysis
Insurance Company X is considering issuing a new policy to cover services required by elderly people who suffer from diseases that afflict the elderly.	What it says: Company X wants to create insurance for elderly people's medical services What it does: Sets up the basic business scenario we're analyzing What it is: Author's setup of business context Visualization: Company X → New Policy → Elderly Customers (diseases) → Medical Services
Premiums for the policy must be low enough to attract customers.	What it says: The insurance prices need to be affordable or people won't buy it What it does: Introduces the first business constraint that limits Company X's options What it is: Author's premise about market reality Visualization: High Premiums → Few Customers vs Low Premiums → Many Customers
Therefore, Company X is concerned that the income from the policies would not be sufficient to pay for the claims that would be made.	What it says: Company X worries they won't collect enough money to pay out claims What it does: Combines the previous facts to show the core business problem What it is: Author's conclusion about the dilemma Visualization: \(\mathrm{Income\ from\ Low\ Premiums} < \mathrm{Payouts\ for\ Elderly\ Claims} = \mathrm{Potential\ Losses}\)

Argument Flow:

The passage starts by describing a business situation, then adds a constraint, and finally shows how these two elements create a problem for the company.

Main Conclusion:

Company X is worried that low premiums won't generate enough income to cover the high medical claims from elderly customers.

Logical Structure:

The argument links the business constraint (low premiums needed) with the target market reality (elderly people have expensive medical needs) to show why the company faces a potential loss scenario.

Prethinking:

Question type:

Misc. - This is asking for strategies to minimize losses, which means we need to find ways to either increase income or decrease payouts while working within the constraints given in the passage.

Precision of Claims

The key claims involve financial quantities (income vs. payouts), quality constraints (premiums must be low enough to attract customers), and the specific activity (covering elderly diseases). We need solutions that respect the low premium constraint.

Strategy

Since this is about minimizing losses, we need to think of ways Company X can either:

Increase income without raising premiums too high
Decrease the amount they pay out in claims, or
Better manage risk

The strategy must work within the constraint that premiums need to stay low to attract customers.

Answer Choices Explained

Attracting middle-aged customers unlikely to submit claims for benefits for many years

Attracting middle-aged customers unlikely to submit claims for benefits for many years - This strategy directly solves Company X's financial problem. Middle-aged customers would pay the same low premiums but wouldn't need expensive medical services for years, creating a pool of income without immediate claims. This gives the company cash flow to help cover the expensive claims from elderly customers. This is the correct strategy.

Insuring only those individuals who did not suffer any serious diseases as children

Insuring only those individuals who did not suffer any serious diseases as children - This doesn't make business sense. Childhood diseases have little correlation with elderly diseases, and excluding people based on childhood health issues wouldn't meaningfully reduce claims from age-related conditions. This strategy doesn't address the core financial imbalance.

Including a greater number of services in the policy than are included in other policies of lower cost

Including a greater number of services in the policy than are included in other policies of lower cost - This would actually increase losses, not minimize them. More services mean more potential claims and higher payouts, which directly worsens the problem Company X is trying to solve. This goes against the goal.

Insuring only those individuals who were rejected by other companies for similar policies

Insuring only those individuals who were rejected by other companies for similar policies - This is terrible business strategy. People rejected by other insurance companies are typically high-risk customers who would file expensive claims. This would dramatically increase losses, not minimize them.

Insuring only those individuals who are wealthy enough to pay for the medical services

Insuring only those individuals who are wealthy enough to pay for the medical services - This contradicts the passage's constraint that premiums must be low to attract customers. If people are wealthy enough to pay for medical services themselves, they won't be attracted to low-premium insurance policies. This strategy undermines the basic business model.

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