In addition to bearing risk, insurance companies also bear

Question

Quizplus · Accepted Answer

Insurance companies not only bear the risk of potential losses but also incur administrative costs, such as salaries, rent, and other expenses related to maintaining operations. They also have to deal with moral hazard costs, which arise when policyholders take more risks because they are insured. Lastly, they have to deal with adverse selection costs, which occur when they attract an unfavorable group of people or when policyholders do not disclose pertinent information.

In Addition to Bearing Risk, Insurance Companies Also Bear