When do insurance companies encounter the problem of moral hazard? When simply having insurance causes people...

When do insurance companies encounter the problem of moral hazard?

When simply having insurance causes people to take more risks than they would otherwise.

When they do not have enough information to distinguish between people who are "good risks" and those who are "bad risks."

When the price of insurance premiums fully reflects all available information.

When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously.

Expert Solution

Option 1

When simply having insurance causes people to take more risks than they would otherwise.

A moral hazard means the person takes more risk because he/she is insured for the risk and increases the probability of losses for himself/herself and the company.

The information is an asymmetric information problem where insured or insurer do not disclose some of the information related to the contract.

Rahul Sunny answered 2 years ago

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