The two big problems facing insurance companies in trying to manage risk are:
A)risk pooling and diversification.
B)risk pooling and adverse selection.
C)adverse selection and moral hazard.
D)moral hazard and diversification.

Question

Quizplus · Accepted Answer

Adverse selection and moral hazard are the two major problems. Adverse selection occurs when there is asymmetric information before a transaction, leading to potentially riskier individuals being more likely to seek insurance. Moral hazard happens when the behavior of the insured party changes in a way that raises risks after the policy is purchased, due to the security the insurance provides.

The Two Big Problems Facing Insurance Companies in Trying to Manage