Consider the following story: Diversifun, Inc., an insurance company, recently decided to offer boat insurance. Diversifun...

Consider the following story:

Diversifun, Inc., an insurance company, recently decided to offer boat insurance. Diversifun was concerned that the most likely boat insurance customers would be the least competent, highest-risk boat captains, because they stand to benefit most from boat insurance coverage. Since Diversifun cannot distinguish perfectly between high-risk and low-risk skippers, it decided to set its boat-insurance premiums a bit higher to account for the foolhardy sea captains.

The economic problem in this story is known as:

A) Adverse selection

B) Signaling

C) Moral hazard

D) Screening

Solutions

Expert Solution

The economic problem in the story is known as Adverse Selection as Adverse selection is the tendency of those in risky jobs or high risk lifestyles to get life insurance. It is a situation where sellers have information that buyers don't (or vice versa) about some aspect of product quality.

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

Consider the following transactions for Huskies Insurance Company.

Consider the following transactions for Huskies Insurance Company. 1. Equipment costing $33,000 is purchased at the beginning of the year for cash. Depreciation on the equipment is $5,500 per year. 2. On June 30, the company lends Its chief financial officer $35,000; principal and Interest at 6% are due In one year. 3. On October 1, the company received $10,000 from a customer for a one-year property Insurance policy. Deferred Revenue Is credited. Required: For each Item, record the necessary adjusting entry for Huskies Insurance...

An insurance company wants to offer a 3 year term insurance contract to a male aged...

An insurance company wants to offer a 3 year term insurance contract to a male aged 70. This contract pays $1M at the end of the year of death if death occurs during the first three years. Premiums are paid at the beginning of each year. Assume r=.02 (annual compounding), and that one year probabilities of death at age 70, 71 and 72 are 0.024, 0.026, 0.028. What is the minimum annual premium?

A global insurance company plans to offer life insurance policies in a developing country. It needs...

A global insurance company plans to offer life insurance policies in a developing country. It needs to estimate how many years, on average, residents of this country will live by reviewing death records of deceased individuals at a local government office. What (minimum) sample size is needed to form a 97% confidence interval to estimate the true average lifespan of residents in this country to within ±1.5 years? Assume the population standard deviation is known to be 10 years. Do...

An insurance company decides to offer individuals insurance against losing their jobs. What problems is it...

An insurance company decides to offer individuals insurance against losing their jobs. What problems is it likely to encounter?

An insurance company would like to offer theft insurance for renters. The policy would pay the...

An insurance company would like to offer theft insurance for renters. The policy would pay the full replacement value of any items that were stolen from the apartment. Some apartments have security alarms installed. Such systems detect a break-in and ring an alarm within the apartment. The insurance company estimates that the probability of a theft in a year is 0.05 if there is no security system and 0.01 if there is a security system (there cannot be more than...

An insurance company would like to offer theft insurance for renters. The policy would pay the...

An insurance company would like to offer theft insurance for renters. The policy would pay the full replacement value of any items that were stolen from the apartment. Some apartments have security alarms installed. Such systems detect a break-in and ring an alarm within the apartment. The insurance company estimates that the probability of a theft in a year is 0.07 if there is no security system and 0.02 if there is a security system (there cannot be more than...

A) A large insurance company offers group disability insurance products to businesses, which in turn offer...

A) A large insurance company offers group disability insurance products to businesses, which in turn offer the product to their employees. Pricing policies to prevent a loss is difficult. Since it is difficult to know exactly which employees are more prone to file claims, it is hard to price policies accurately. If policies are priced too low, high-risk clients will be attracted and losses incurred. If policies are priced too high, not enough clients will be attracted. Compounding this factor...

Respond to the following scenario: Security Insurance, Inc., issued an insurance policy to a company providing...

Respond to the following scenario: Security Insurance, Inc., issued an insurance policy to a company providing an employee, Jessica Garcia, with disability insurance. Soon thereafter, she was diagnosed with “panic disorder and phobia of returning to work.” Garcia lost her job and sought disability coverage. Security denied coverage, doubting the diagnosis of disability. Garcia and her employer sued Security. During pretrial discovery, the insurer learned that Garcia had stated on the policy application that she had never been treated for...

Pina Company has decided to expand its operations. The bookkeeper recently completed the following balance sheet...

Pina Company has decided to expand its operations. The bookkeeper recently completed the following balance sheet in order to obtain additional funds for expansion. PINA COMPANY BALANCE SHEET FOR THE YEAR ENDED 2020 Current assets Cash $233,500 Accounts receivable (net) 343,500 Inventory (lower-of-average-cost-or-market) 404,500 Equity investments (marketable)-at cost (fair value $123,500) 143,500 Property, plant, and equipment Buildings (net) 573,500 Equipment (net) 163,500 Land held for future use 178,500 Intangible assets Goodwill 83,500 Cash surrender value of life insurance 93,500 Prepaid...

Whispering Company has decided to expand its operations. The bookkeeper recently completed the following balance sheet...

Whispering Company has decided to expand its operations. The bookkeeper recently completed the following balance sheet in order to obtain additional funds for expansion. WHISPERING COMPANY BALANCE SHEET FOR THE YEAR ENDED 2020 Current assets Cash $239,000 Accounts receivable (net) 349,000 Inventory (lower-of-average-cost-or-market) 410,000 Equity investments (marketable)-at cost (fair value $129,000) 149,000 Property, plant, and equipment Buildings (net) 579,000 Equipment (net) 169,000 Land held for future use 184,000 Intangible assets Goodwill 89,000 Cash surrender value of life insurance 99,000 Prepaid...

Subjects