Asked by Sebastian Pernett on Sep 24, 2024

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​One of the solutions to the adverse selection problem in insurance is

A) ​Is to require that only the high risk individuals to buy insurance
B) Is to require that only the low risk individuals buy insurance
C) Is to require everyone to buy insurance
D) ​Is to completely ban insurance companies

Adverse Selection

A situation in which one party in a transaction has more information than the other, leading to an imbalance and potentially poor market outcomes, commonly seen in insurance markets.

Insurance

A financial product or agreement that provides compensation for specific losses or damages in return for payments made.

High Risk

Refers to situations or investments that have a high potential for loss or failure.

  • Gain an understanding of the role of screening and signaling in addressing adverse selection issues within the insurance sector.
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Sagarika Saravanan5 days ago
Final Answer :
C
Explanation :
Requiring everyone to buy insurance helps to balance out the risk pool and prevent adverse selection. If only high-risk individuals are required to buy insurance, then premiums may become too expensive for them to afford, leading to further adverse selection. Alternatively, if only low-risk individuals are required to buy insurance, then insurance companies may not have enough revenue to cover the losses of high-risk individuals. By requiring everyone to buy insurance, the risk pool becomes more diverse and premiums can be set at a level that covers losses across the whole population.