Susan buys automobile insurance from Provident Insurance Company. If Susan avoids having an accident for three years, Provident will reduce the premiums she has to pay for her insurance. Nevertheless, she routinely drives while eating or texting and speeds up to try to make it through yellow lights.

Question

Quizplus · Accepted Answer

Susan's behavior of driving while distracted and taking risks to make it through yellow lights creates a moral hazard problem for Provident Insurance Company. Moral hazard refers to the increased risk-taking behavior of individuals or firms when they are insured, which can lead to higher costs for the insurer. In other words, Susan's actions increase the likelihood of her getting into an accident, which would result in Provident having to pay out more in insurance claims. Provident may need to adjust premiums or put in provisions to address this behavior.

Susan Buys Automobile Insurance from Provident Insurance Company