An insurance lacks the information needed to distinguish between safe and risky people and therefore charges everyone the same average premium. As a result, the ________ people will not buy insurance, and the industry will be selling only to ________ people.

Question

Quizplus · Accepted Answer

This scenario describes adverse selection, where safer individuals opt out of insurance due to high premiums designed for an average risk that includes both safe and risky individuals. Consequently, the insurance market becomes more appealing to risky individuals who are more likely to claim, as the premium represents better value for their risk level.

An Insurance Lacks the Information Needed to Distinguish Between Safe