agents consumption levels in the good and bad state of risky option once insurance is taken
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Step 1: Determine the consumption levels in the good and bad state of the risky option without insurance. Show more…
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Insurance buyers have more information about whether they are high-risk or low-risk than the insurance company does. This creates an asymmetric information problem for the insurance company because buyers who are high-risk tend to want to buy more insurance, without letting the insurance company know about their higher risk. How might this problem impact an insurance company? Question options: The company will be faced with heavy losses. The insurance company may decide not to sell insurance in this market at all or otherwise choose not to sell insurance to those they can identify as high risk. The insurance buyers, not the company, will be impacted. As high risk buyers submit claims, they will use up the company's funds for that year, and since the company did not adjust for these high risk claims, once that money is used up, remaining claimants won't receive any coverage. The company will not be impacted.
Crystal W.
When people have insurance against a certain event, the notion that those people are less likely to guard against that event occurring is called a _____________________ . a. risk b. hazard risk c. moral hazard d. moral risk
Sanchit J.
An insurance company provides insurance policy coverage for automobile owners at a fixed yearly premium. If customers are a poor risk, the company is likely to pay out more in damages than it collects in premiums. However, if the customers are good risks, the company stands to make a profit, since the company will collect the premium but will likely not have to pay out in damages. The company would like to have this customer's business. Each time a customer applies for insurance the company is faced with a decision based on the following hypotheses. H_o: The customer is a good risk. H_a: The customer is a bad risk. Which of the following represents a Type II error and its consequence for the company? (A) The company decides that the customer is a bad risk but he was, in fact, a good risk. The company misses an opportunity to make a profit. (B) The company decides that the customer is a bad risk but he was, in fact, a good risk. The company loses money. (C) The company decides that the customer is a good risk but he was, in fact, a bad risk. The company loses money. (D) The company decides that the customer is a good risk but he was, in fact, a bad risk. The company makes a profit. (E) The company decides that the customer is a bad risk and he is a bad risk and the company avoids losing money.
Madhur L.
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