A person who discovers that he/she has advanced stages of cancer and calls his/her life insurance agent to double his/her insurance policy is an example of:
A) a moral hazard risk.
B) the risk of adverse selection.
C) the problem of information symmetry.
D) risk spreading.

Question

Quizplus · Accepted Answer

This situation is an example of adverse selection because the individual's decision to increase their life insurance policy is based on the private information they have about their health status. The insurance company may view this individual as a higher risk and may increase their premium or deny coverage altogether due to the increased likelihood of a payout. This type of information asymmetry can lead to adverse selection, where those who are high-risk are more likely to purchase insurance, driving up costs for the insurer.

A Person Who Discovers That He/she Has Advanced Stages of Cancer