Shawn buys automobile insurance from Safe-T Insurance Company.If Shawn avoids having an accident for three years,Safe-T will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.
A) This adverse selection problem could be fixed by reducing Shawn's insurance rates now. By doing this, Shawn will drive more carefully now to prevent his rates being increased after an accident.
B) Safe-T has an ongoing adverse selection problem with Shawn and other customers since it is difficult for Safe-T to select good customers.
C) This is a typical principal-agent problem.
D) Both A and C are correct.
Correct Answer:
Verified
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