Question

Suppose two individuals are buying insurance. Ms. Tanaka has a preexisting condition that she does not report when filling out the forms and hopes will not be detected during tests. Mario has not had insurance but plans to do more foreign travel as soon as he’s covered, including visits to remote and exotic locations. What problem for insurers does each person illustrate?

Answer 1

Answer:

• Ms. Tanaka :  Adverse selection
• Mario : Moral hazard

Explanation:

In the case of Ms. Tanaka, a tendency for a dangerous job is presented. It has a high-risk lifestyle to purchase products like life insurance. The unequal information hidden distorts the market and leads to market failure.

In the case of Mario, his exposure to risk has increased when insured, especially when a person takes more risks because someone else bears the cost of those risks. He is going to get involved in a risky event knowing that it is protected by the insurance