What is one way insurers address moral hazard (hidden action)problems to align the interest of the insured with the insurer?
A)Underwriting all applicants for insurance
B)Charging lower premiums for riskier ventures
C)Performance based incentives (i.e. linking premiums to presence of fire detectors)
D)Insuring different parties from the same industry
E)Require full disclosure of all information (i.e. health status prior to issuing an income annuity)

Question

Quizplus · Accepted Answer

Performance based incentives, such as linking premiums to the presence of fire detectors, can encourage the insured to take steps to reduce the likelihood of the insured event occurring, aligning the interest of the insured with the insurer. By doing so, the insurer is protected from adverse selection, where individuals are more likely to seek insurance if they know they are at higher risk of experiencing the insured event.

What Is One Way Insurers Address Moral Hazard (Hidden Action)problems