The requirement that all drivers must carry auto insurance reduces
A) moral hazard.
B) the effectiveness of signaling.
C) adverse selection.
D) the chance of auto accidents.

Question

Quizplus · Accepted Answer

The requirement that all drivers must carry auto insurance reduces adverse selection. Adverse selection refers to the situation where high-risk individuals are more likely to purchase insurance, which causes insurance companies to raise premiums to compensate for the higher risk. By mandating that all drivers must have insurance, the pool of insured individuals is increased, reducing adverse selection. This helps keep insurance premiums lower for all drivers.

The Requirement That All Drivers Must Carry Auto Insurance Reduces