Question

Coverall, Inc., an insurance company, recently moved into the motorcycle insurance market. Coverall was concerned that the most likely motorcycle insurance customers are those who ride their motorcycles recklessly, because they would benefit most from insurance coverage. Since Coverall cannot distinguish perfectly between high-risk and low-risk cyclists, it raised its motorcycle premiums in an effort to account for the reckless riders.
The economic problem in this story is known as: _______
Adverse Selection

Answer 1

The economic problem in this story is know as: Adverse selection

Explanation:

Adverse selection is a term associated with the situation where "a buyer knows few details which the seller is unaware" and vice versa.

The buyer do not match with the expectation of seller and vice-versa.

Best example is the "insurance policy".

The insurer who works in dangerous job like race car, working with explosives, etc but the insurance company does not know that he / she is working in high risk job.

Also sicker people are more dangerous to the insurance company, since they will claim for sure.