Insurance companies try to mitigate the problem of adverse selection by:
A) asking potential customers a seemingly endless list of questions to gain as much information as they can about the person's risk characteristics.
B) charging a higher premium to groups with similar ages or behaviors that correlate with risky behavior.
C) charge a higher price to all individuals to cover the lack of information.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

Insurance companies use all of these strategies to mitigate the problem of adverse selection. By asking potential customers a lot of questions, insurance companies can gain more information about the person's risk characteristics and make a more informed decision about their risk level. Charging higher premiums to groups with similar ages or behaviors that correlate with risky behavior helps to spread the risk across a larger pool of people. Additionally, charging a higher price to all individuals helps to cover the costs associated with insuring high-risk individuals. These strategies collectively help to balance the risk pool and reduce the impact of adverse selection on insurance companies.

Insurance Companies Try to Mitigate the Problem of Adverse Selection