Question

Usually people or companies with high risks are more likely to purchase insurance. This is called...

Usually people or companies with high risks are more likely to purchase insurance. This is called adverse selection. True False

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

True.

By definition, Adverse selection occurs when buyers have better information than sellers, and this can distort the usual market process. It can lead to missing markets as firms do not find it profitable to sell a good.

As an example for life insurance companies, their insurance products are bought by people who see a high risk attached to their life. If now, the insurance companies charge them an average premium, they are going to make a loss (since event has a high probability of occurence and they will have to pay out the claims).

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
In a private insurance market, there are two different kinds of people: some who are more...
In a private insurance market, there are two different kinds of people: some who are more likely to require expensive medical treatment and some who are less likely to require medical treatment and, if they do, to require less expensive treatment. One health insurance policy is offered, tailored to the average person's health care needs: the premium is equal to the average person's medical expenses (plus the insurer's expenses and normal profit). In an effort to avoid the adverse selection...
Suppose that an insurance company wants to offer insurance for bicycle theft. They do a careful...
Suppose that an insurance company wants to offer insurance for bicycle theft. They do a careful market survey and find that the incident of theft varies widely across communities. In some areas there is a high probability that a bicycle will be stolen, and in other areas thefts are quite rare. Suppose that the insurance company decides to offer the insurance based on the average theft rate. What do you think will happen? Answer: the insurance company is likely to...
Insurance companies in general must guard against having a disproportionate number of bad risks as policyholders.  For...
Insurance companies in general must guard against having a disproportionate number of bad risks as policyholders.  For their own profitability, they need to see the total payouts for a year as a fairly small percentage of the total premiums. This fundamental problem for insurance companies is known as a. inflation risk. b. co-insurance. c. adverse selection. d. deductible risk. e. rate of return risk. As a deterrent to keep individuals from excessively submitting claims to the insurance policy and for policyholders...
Contrary to economic theory, individuals are more likely to insurance high probability, low cost events, and...
Contrary to economic theory, individuals are more likely to insurance high probability, low cost events, and less likely to insurance low probability, high cost events. What might explain this behavior?
When the exposure leads people to seek medical attention, which makes them more likely than people...
When the exposure leads people to seek medical attention, which makes them more likely than people without the exposure to be diagnosed with the outcome of interest, this is called: Berksonian bias Protopathic bias Detection bias Self-selection bias
31. Which of the following problems would most likely be a concern for life insurance companies...
31. Which of the following problems would most likely be a concern for life insurance companies that are worried about differentiating between good risks and bad risks? A. Adverse selection B. Catastrophe risk C. Longevity risk D. Moral hazard 32.Which of the following statements regarding the capital requirements and regulation of insurance companies is correct? A. Insurance companies are regulated at both the state and federal level. B. The guaranty system for insurance companies consists of a permanent fund created...
An amount of money specified in an insurance contract which the insured party has to pay...
An amount of money specified in an insurance contract which the insured party has to pay toward the loss before being entitled to compensation is called a(n): Exclusion Cap Deductible Copayment True/False.  The more diversified the risks in a portfolio of a given size, the less it will cost to insure the total value of the portfolio against a loss. The ___more or less____ correlated the assets in your portfolio are with each other, the better your diversification will be. All...
1.Transportation companies are able to deny shipments because they deem the value of the shipment as...
1.Transportation companies are able to deny shipments because they deem the value of the shipment as too high. Group of answer choices True False 2.Weighted moving average forecasting usually places more emphasis on demand information from periods that are further away in time. Group of answer choices True False 3.LTL trucking carriers operate based on a network called: Group of answer choices Hub and Spoke Forward and Reverse Linehaul and Backhaul Ball and Chain
QUESTION 5 Which of the following best describes Cross Elasticity: a. As incomes rise, more people...
QUESTION 5 Which of the following best describes Cross Elasticity: a. As incomes rise, more people will purchase vacation packages. b. If the price of gasoline goes up, more people will car pool. c. If the price of coke goes up, more people will buy pepsi. d. If the price of your prescription goes up, you will continue to purchase because you need them. QUESTION 6 Households representing middle income earners are growing faster than the low and high income...
The idea of insurance is that we all face risks that are unlikely but carry high...
The idea of insurance is that we all face risks that are unlikely but carry high cost. Think of a fire destroying your home. So we form a group to share the risk: we all pay a small amount, and the insurance policy pays a large amount to those few of us whose homes burn down. An insurance company looks at the records for millions of homeowners and sees that the mean loss from fire in a year is μ...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT