Asked by Taylor Lopez on Jun 13, 2024
Verified
Companies offering life insurance often require a drug test to determine whether the buyer is a smoker.A smoker must pay a higher premium.This is an example of:
A) providing the buyer with a personal stake,a way of dealing with moral hazard.
B) screening to deal with adverse selection.
C) the demand curve shifting right because of an increase in risk.
D) pooling of risk with others.
Screening
Screening is a process used by employers, lenders, and others to assess the qualifications, risks, or qualities of applicants before making a decision.
Life Insurance
A financial product that provides a payout to the beneficiaries upon the death of the insured.
Drug Test
A drug test is a technical analysis of a biological specimen that's used to detect the presence or absence of specified parent drugs or their metabolites.
- Appreciate the significance of signaling and screening in reducing information asymmetry.
- Understand the principles behind the design of insurance policies to minimize adverse outcomes.
Verified Answer
DM
Diara Md JadiJun 18, 2024
Final Answer :
B
Explanation :
This is an example of screening to deal with adverse selection. Insurers require drug tests to determine whether the buyer is a smoker and therefore at higher risk for health complications. By charging smokers a higher premium, insurers are able to mitigate their risk of having to pay out larger claims for health-related issues. This is a way of addressing adverse selection, where individuals with a higher risk of health issues are more likely to purchase insurance.
Learning Objectives
- Appreciate the significance of signaling and screening in reducing information asymmetry.
- Understand the principles behind the design of insurance policies to minimize adverse outcomes.