What are adverse selection problems? How does adverseselection affect the profitable management of an insurance...

What are adverse selection problems? How does adverse selection affect the profitable management of an insurance company? Write 200 words.

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Expert Solution

Adverse selection problems -

It is basically a kind of situation where one party of a contract has possess more information and knowledge about something than the other party. So the other party gets the disadvantage of having possessed less information. Hence, this inequality leads to the inefficiency of the prices and quantity of goods and services.

How it affects the profitable management of an insurance company -

Customers who are actually in need of the insurance policies, try to acquire it for their own benefits. The insurance companies have their own premium plan and offer to the customers based on the population and income rate of the customers. So, although the insurance companies can be able to cover up their premium revenues due to the help of risk-taking customers, this leads to having an ignorance of the necessary revenues which are needed to cover up the insurance liabilities, by the insurance companies. This leads to having a downfall in the profitability of the insurance companies.

keosha answered 2 years ago

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