Question

PERFECT INFORMATION (customers were required to show sellers their risk card), to ASYMMETRIC INFORMATION (customers knew their risk but could lie to the seller), and then to SYMMETRIC UNCERTAINTY (neither the customer nor seller knew the customer's risk until after the decision to buy and sell insurance had been made.

Consider the rounds with a Free Market (in which sellers could charge every customer a different price, and could refuse coverage to individual customers). As available information changed from perfect information to asymmetric information, and then from asymmetric information to symmetric uncertainty, how and why do you think the following changed? (a) The premiums (prices) offered to customers; (b) The number of customers offered insurance; and, (c) The number of uninsured. AND Explain?

Answer 1

1) The premium prices will increase . Since companies suffer from asymmetric information problem where customers know about their health problems but often hide them during purchase of an insurance , health check up and little high premium is charged to cover the costs of the company . Also when there is symmetric uncertainty higher premiums are charged to be prepared for future claimings .

2) The number of customers offered insurance decreases . People are not provided insurance randomly but only after a through medical check up , also the risk and benefit ratio are analysed .

3) When the situation is of symmetric uncertainty neither sellers nor buyers know about the risks . In this case number of uninsured will not be high because company does not know the risk yet , so will want to provide insurance to as many possible in order to make profits .