Question

Analyze whether the insuance market can reduce adverse selection and/or moral hazard problems.

Answer 1

Most businesses have business property and inventory.if there is FIR robbery or other type of accident leading to damage or property loss of business assets a general liability policy covers the business to the policy limits. It also protect the building the business places for operations. Insurance protect against liabilities, It replaces income.adverse selection aur moral hazard problems occurs in different type of situation and different arenas. In the financial sector 1 motivator can bailouts.

Moral hazard in one of its most basic form occur when employees Shirk responsibility at their place of employment. An employee has a basic incentive to do the the least amount of work for the same amount of pay. The employer establish incentives that encourage employees to accomplish and above average workload.

adverse selection is an undesired result because one party has more information for a product advantage then the other party anticipates. The client seizes the opportunity because of the imbalance in information that they possess are the product advantage which weighs in their favour.
Insurance company is can take following measures to reduce adverse selection or model hazard.
A. By proper pricing, adequate pricing insurance for the risk insured.
B. Reselection features benefits are underwriting rules that attract above average risk.
C. Spread of risk. Seek to obtain an optimum spread of independent loss exposure by location class size and line of business.
the risk of adverse selection and moral hazards are lower with insurance products that are allowed adequate pricing and underwriting guidelines.conversely those products that are not granted that same level of authority can anticipate they will attract risk that have greater exposure or need the coverage most.
Above problems adverse selection and moral hazard can be control by insurance company by aligning the policy premium and benefits apart from using modern and writing skills. In group policy is it become incumbent upon the group policy administrator to ensure that both of these are avoided to ensure long-term sustainability of the cover and avoidance of of increase in premiums due to adverse claim of the group. By this way insurance market can reduce adverse selection our moral hazard problem.