The insurance industry operates on the principles of:

A) risk trading and diversification.
B) exploitation and capital accumulation.
C) moral hazard and irrationality.
D) adverse selection and diminishing marginal utility.

Risk Trading

The act of exchanging financial instruments or commodities with a variable level of risk, often in the hope of gaining a higher return.

Adverse Selection

A situation in economics and insurance where parties with higher risk are more likely to engage in an agreement, leading to unbalanced and unfavorable outcomes for one of the parties.

Diversification

An investment strategy aimed at reducing risk by allocating investments among various financial instruments, industries, or other categories.