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?

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 2 years ago

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