Use the following setup for question
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
-One of the solutions to the adverse selection problem in insurance is
A)Is to require that only the high risk individuals to buy insurance
B)Is to require that only the low risk individuals buy insurance
C)Is to require everyone to buy insurance
D)Is to completely ban insurance companies

Question

​Use the following setup for question
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
-​One of the solutions to the adverse selection problem in insurance is
A)​Is to require that only the high risk individuals to buy insurance
B)Is to require that only the low risk individuals buy insurance
C)Is to require everyone to buy insurance
D)​Is to completely ban insurance companies

Quizplus · Accepted Answer

Requiring everyone to buy insurance helps to balance out the risk pool and prevent adverse selection. If only high-risk individuals are required to buy insurance, then premiums may become too expensive for them to afford, leading to further adverse selection. Alternatively, if only low-risk individuals are required to buy insurance, then insurance companies may not have enough revenue to cover the losses of high-risk individuals. By requiring everyone to buy insurance, the risk pool becomes more diverse and premiums can be set at a level that covers losses across the whole population.

​Use the Following Setup for Question

Use the Following Setup for Question