Homeowners policies exclude loss caused by flood due to the problem of adverse selection because:
A)only large insurers would be able to insure flood risk, creating unfair competition.
B)only those living in flood-prone areas would buy the coverage.
C)it encourages nonfortuitous events.
D)only stock insurers would insure flood risk.
E)only mutual insurers would insure flood risk.

Question

Quizplus · Accepted Answer

The primary reason homeowners policies exclude flood loss is due to adverse selection, where only those most likely to need the coverage (i.e., those living in flood-prone areas) would purchase it, leading to an unbalanced and unsustainable insurance pool.

Homeowners Policies Exclude Loss Caused by Flood Due to the Problem