Asked by Zahra Al-Radwan on Jul 09, 2024
Verified
Adverse selection in insurance requires that
A) all people face the same risk
B) potential customers facing more risk are no more interested in purchasing insurance
C) people are risk averse
D) insurers can tell higher risk people from lower risk people
Adverse Selection
A situation in which one party in a transaction has more information than the other, often leading to a negative outcome for the less-informed party.
Insurance
A financial product that provides protection against losses or damages to a person or property in exchange for premium payments.
- Acquire knowledge about the notion of adverse selection in the context of insurance industries.
Verified Answer
SC
Sathita CheeranontJul 11, 2024
Final Answer :
C
Explanation :
Adverse selection occurs when individuals who perceive themselves to be at higher risk are more likely to purchase insurance, while those at lower risk are less likely to do so. This phenomenon relies on the fact that people are risk averse, meaning they prefer to avoid uncertainty and potential losses, leading those who anticipate higher risks to seek insurance more actively than those who anticipate lower risks.
Learning Objectives
- Acquire knowledge about the notion of adverse selection in the context of insurance industries.
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