Export Development Canada (EDC) provides insurance to Canadian exporters for their accounts receivable from foreign buyers. If EDC charges an insurance premium that reflects the average level of risk of the exporting firms, it is only the most risky firms that will tend to purchase insurance. This is an example of

Question

Quizplus · Accepted Answer

Adverse selection occurs when higher-risk individuals or firms are more likely to purchase insurance or participate in a program, leading to an imbalance in the risk pool and potentially increasing the cost of insurance for everyone. In this case, if EDC charges a premium that reflects the average level of risk for all exporting firms, the most risky firms will be more motivated to purchase insurance, leaving the less risky firms out of the market. This can lead to a situation where EDC is insuring a pool of riskier accounts receivable, potentially increasing the cost of insurance for all firms.

Export Development Canada (EDC) Provides Insurance to Canadian Exporters for Their