Question

For each of the following kinds of insurance, give an example of behaviour that can be normal hazard and another example of behaviour that can be called adverse selection. Health insurance. Car insurance

Answer 1

Answer:

Health insurance: working without safety equipment

Car insurance: reckless drive

Health insurance: withhold of the information that the insured is a smoker

Car insurance: withhold of the information that insured lives in neighborhood with high crime levels

Explanation:

Moral hazard relates to the behavior that enlarges the possibility of occurrence of undesired events that is insured. In health care the example could be a person that does risky jobs without wearing safety equipment. That is something that can easily lead to that person's deterioration of health at job. In car insurance, that can be reckless drive of an insured. Adverse selection happens when for instance signee of policy insurance withholds certain information, whose revelation would have potential elevating effect on paid premiums. In healthcare it could be non-disclosure of the information that the insured is a smoker, where in the application says otherwise. In car insurance it could be withhold of the information that the insured lives in the neighborhood with high crime level, while in the policy it is stated otherwise.