Although they have never been charged with a DUI, Glen and Dale often drive while intoxicated and each made 3 claims for auto accidents in 2010. If Crown Insurance decides to raise the price of insurance coverage for all its policy holders to $3,000 per year to off-set the claims of this type of driver, then its attempt to counter
A) the moral hazard problem will be satisfactorily addressed.
B) adverse selection will cause the low-risk policy holders to cancel their policies.
C) the moral hazard problem will cause the high-risk group to cancel their policies.
D) the adverse selection will be satisfactorily addressed.

Question

Quizplus · Accepted Answer

Raising insurance premiums for all policyholders due to the behavior of high-risk drivers like Glen and Dale can lead to adverse selection. Low-risk policyholders may find the increased premiums unjustified for their risk level and decide to cancel their policies, leaving the insurance company with a higher proportion of high-risk policyholders. This does not directly address the moral hazard problem, which involves individuals taking more risks because they are insured, nor does it ensure that high-risk individuals will cancel their policies.

Although They Have Never Been Charged with a DUI, Glen