Manuel buys automobile insurance from Ax-i-Dent Insurance Company.If Manuel avoids having an accident for three years,Ax-i-Dent will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.

Question

Quizplus · Accepted Answer

This is a classic example of moral hazard, where Manuel may take more risks knowing that he is insured and that the cost will not affect him directly. It is up to the insurance company to mitigate this risk by setting the premium at a level that reflects Manuel's actual risk level.

Manuel Buys Automobile Insurance from Ax-I-Dent Insurance Company