optimal compensation principle for option 1 vs option 2

y438huan

In the wiki article:
"
For option 1: pure market solution

Compensation may not be sufficient however so this option would likely have sub-optimal compensation

For option 2: evolved status quo

→ sub-optimal compensation due to provincial DFA variability
"

Both option 1 and option 2 have ** sub-optimal compensation **, why it is neutral for option 1but weak for option 2? Can you explain a little bit further about this?

Thanks

graham

Keep in mind that these ratings, strong/neutral/weak, are judgmental so different people may come up with different ratings. In this case, I think the reasoning is as follows:

• For option 1 (pure market solution) premiums are risk-based but that means people in high-risk areas may not be able to afford full coverage. Those people may have to buy cheaper policies with lower limits and higher deductibles and that makes the compensation sub-optimal, but not terrible, so it gets a neutral rating.
• Option 2 (mixture between the pure market and government) may suffer from the same problem as option 1, but the variability in DFA payments then magnifies the problem. In other words, there are 2 issues that negatively impact whether compensation is optimal, so this option gets a lower score (weak.)

But like I said, these ratings are judgmental. I don't think there was any formula or method to come up with them. They're just supposed to provide a general understanding of the merits of each option relative to the 6 criteria.

suomi

@graham , could you also explain Option 3? Why is compensation optimal in this case? I don't understand why "predictable & sufficient" implies optimal compensation

graham

The source text defines what they mean by "optimal compensation" on page 5:

In other words, the definition of "optimal compensation" as used in the source text is that compensation is "predictable and sufficient". There's nothing else to it.