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.