The insurance industry is susceptible to adverse selection problems, but not problems of moral hazard.

Question

Quizplus · Accepted Answer

Both adverse selection and moral hazard are significant issues in the insurance industry. Adverse selection occurs when there is asymmetric information before the transaction, leading to higher-risk individuals being more likely to purchase insurance. Moral hazard happens post-contract, where the insured's behavior changes in a way that may increase the likelihood of a claim because they bear less risk.

The Insurance Industry Is Susceptible to Adverse Selection Problems, but Not