In the auto insurance market, who is most likely to have private information that leads to...

In the auto insurance market, who is most likely to have private information that leads to adverse selection? Please explain how the private information distorts the market and what can be done to correct this?

Solutions

Expert Solution

Answer - In the market for auto insurance , the owner of the vehicle , or the participant is likely to have the private information leading to adverse selection. This is because the automobile may be in bad condition from before , or have any other problem which will make it disfunctional very soon after the insurance is taken , but the owner conceals this fact from the insurance company. The company will be at greater risk here. This will cause the problem of adverse selection.

Now , if the insurance company will not know about all the risk , it will charge lesser amount of premium from the participant. But the amount of risk which company will have to face will be greater. The company will be at loss here.

To avoid this , the company must make the proper risk assesment , charge the greater amount of premium from participant for the greater risk after proper assesment and also put a cap upon the coverage of the insurance.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

1)In the market for insurance, the moral hazard problem leads: those most likely to collect on...

1)In the market for insurance, the moral hazard problem leads: those most likely to collect on insurance to buy it. those who buy insurance to take fewer precautions to avoid the insured risk. those with less insurance to take on more risk. to none of the above. 2)In the market for insurance, the adverse selection problem leads those most likely to collect on insurance to buy it. those who buy insurance to take fewer precautions to avoid the insured risk....

The risk that insurance companies have that those individuals who will likely have the most claims...

The risk that insurance companies have that those individuals who will likely have the most claims are the most likely to seek out buying insurance is called: subrogation adverse selection underwriting perils

1. An efficient market for risk, such as an insurance market, is MOST likely to exist:...

1. An efficient market for risk, such as an insurance market, is MOST likely to exist: Select one: a. when there are significant differences between individuals' wealth levels and attitudes toward risk. b. in the presence of private, or asymmetric, information. c. when the sellers of insurance are risk-averse but the purchasers are not. d. when there is a level playing field so that all participants have approximately the same wealth and the same degree of risk aversion. 2. Which...

Which of the following losses is most likely to be covered under your auto liability insurance?...

Which of the following losses is most likely to be covered under your auto liability insurance? a. an auto repair bill for repairs to the car of a driver who negligently caused an accident with you. b. a legal bill incurred by your insurance company who is defending you from a claim related to an accident caused by your negligence. c. a medical bill for injuries to a passenger in your car arising from an accident in which you were...

The individual health insurance market covers most people who have health insurance. covers a small percentage...

The individual health insurance market covers most people who have health insurance. covers a small percentage of people with health insurance. is used by employers for their employees. has been eliminated by the Affordable Care Act The claims experience of an insurer’s enrollees does not include the benefits available to the enrollees. the demographic characteristics of the enrollees. the cost-containment provisions of the health plan. the insurer’s administrative costs.

How is the Judgement Proof problem mitigated in the auto insurance market? A.Personal auto insurance policies...

How is the Judgement Proof problem mitigated in the auto insurance market? A.Personal auto insurance policies exclude losses occurring when the auto is used for non-personal (business) use B.Purchase of Auto Insurance is mandatory to operate a vehicle C.Insurance companies offer Umbrella Insurance to increase the liability coverage above that offered in Auto Insurance policies D.All states have enacted Financial Responsibility laws

______________ is the problem faced by insurance companies because individuals who are more likely to have...

______________ is the problem faced by insurance companies because individuals who are more likely to have claims are also more likely to purchase insurance. (2 points) a. Moral hazard b. Adverse selection c. Fee-for-Service d. Managed Care

There are two kinds of consumers who are looking to buy auto insurance from an insurance...

There are two kinds of consumers who are looking to buy auto insurance from an insurance firm – Reckless drivers (R) and Safe Drivers (S). 50 percent of the consumer population is R and 50 percent is S.The insurance company’s cost of servicing a consumer is $80 if she is a safe driver and $120 if she is a reckless driver. The value of the insurance is $100 to S and $150 to R. What is the total surplus? Suppose...

A cis-acting mutation that leads to MINIMAL expression of the lac operon would most likely be...

A cis-acting mutation that leads to MINIMAL expression of the lac operon would most likely be in the CAP binding site. Is this true or false, and why? Thanks!

Most states currently have a. compulsory auto insurance laws, but not financial responsibility laws. b. financial...

Most states currently have a. compulsory auto insurance laws, but not financial responsibility laws. b. financial responsibility laws, but not compulsory auto insurance laws. c. no-fault laws. d. compulsory auto insurance laws and financial responsibility laws. Which of the following is a factor in determining the premium for an individual's automobile insurance? a. the use of the automobile. b. the area in which the automobile is garaged and operated. c. past accidents in which the driver was not at fault....

Subjects