Screening
A) leads to a pooling equilibrium in the insurance market.
B) means an uninformed person passes knowledge to an informed person.
C) makes no-claim bonuses unnecessary.
D) explains why insurance companies offer low-premium, high-deductible policies and high-premium, low-deductible policies.
E) makes the insurance market inefficient.

Question

Quizplus · Accepted Answer

Screening explains why insurance companies offer both low-premium, high-deductible policies and high-premium, low-deductible policies. High-risk individuals are more likely to choose the low-deductible policy because they will need to use their insurance more often, while low-risk individuals are more likely to choose the high-deductible policy because they are less likely to need to use it. This allows insurance companies to make more accurate risk assessments and set their premiums accordingly.