Question

Suppose you are trying to obtain car insurance from Geico. Upon checking your driving record, Geico denies your application because Geico finds out that you have had too many speeding tickets. In this example, Geico is using ________ to reduce _________.

Select one:

A. restrictive covenant- moral hazard

B. restrictive covenant - adverse selection

C. screening- moral hazard

D. screening - adverse selection

Answer 1

---->Answer is option D.......because,screening is a strategy used to combat or reduce adverse selection by filtering out false information and retaining only the true information. Adverse selection for insurers occurs when an applicant manages to obtain coverage at lower premiums than the insurance company would charge if it were aware of the actual risk regarding the applicant. So in the above example,Geico finds that you have had too many speeding tickets and Geico denies your application to reduce adverse selection.