If a state requires all drivers to buy auto insurance, the problem of adverse selection is eliminated.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party to a transaction has more information than the other party. In the case of auto insurance, the driver has more information about their own driving habits than the insurance company. This can lead to the driver buying less insurance than they need, or buying insurance that is too expensive. When a state requires all drivers to buy auto insurance, the problem of adverse selection is eliminated because all drivers are required to have the same amount of insurance.

If a State Requires All Drivers to Buy Auto Insurance