Which statement is TRUE if the insurance market is efficient?
A) The deductibles eliminate moral hazard.
B) Society as a whole engages in less risky behaviour.
C) It transfers risk from those who most want to get rid of it to those least bothered by the risk.
D) Premiums are always kept to the level of a fair insurance policy.

Question

Quizplus · Accepted Answer

In an efficient insurance market, risk is transferred from those who are risk-averse and want to get rid of it to those who are less bothered by the risk. This is because insurers can pool the risks of many individuals and businesses, which allows them to diversify their portfolios and spread the risk. As a result, premiums will be set at a level that reflects the risk of the policyholder, and deductibles are used to mitigate moral hazard. However, it does not necessarily mean that society as a whole engages in less risky behavior, nor that premiums are always at the level of a fair insurance policy.

Which Statement Is TRUE If the Insurance Market Is Efficient