Asked by Prince Denis on Sep 24, 2024
Verified
Adverse selection in insurance requires that
A) all people face the same risk
B) potential customers facing more risk are more interested in purchasing insurance
C) people are not risk averse
D) insurers can tell higher risk people from lower risk people
Adverse Selection
Refers to the fact that “bad types” are likely to be selected in transactions where one party is better informed than the other. Examples include higher risk individuals being more likely to purchase insurance, more low-quality cars (lemons) being offered for sale, or lazy workers being more likely to accept job offers. Adverse selection is a precontractual problem that arises from hidden information about risks, quality, or character.
Insurance
A financial product offering protection against the potential financial loss or liability resulting from specific events or circumstances, in exchange for a premium payment.
- Comprehend the concept of adverse selection in insurance markets.
Verified Answer
SH
Serena Hernandez4 days ago
Final Answer :
B
Explanation :
Adverse selection occurs when individuals with a higher risk of a certain event are more likely to purchase insurance for that event than individuals at lower risk. This happens because individuals have more information about their own risk levels than insurers do, leading those at higher risk to seek insurance more often.
Learning Objectives
- Comprehend the concept of adverse selection in insurance markets.