In an insurance market,________ occurs when one type of policy generates losses,while another type of policy generates profits,and all policies collectively break even.
A) cross-subsidization
B) pooling
C) a separating equilibrium
D) screening

Question

Quizplus · Accepted Answer

Cross-subsidization occurs when a group of policyholders with lower risks pay more than they should in order to support a group of policyholders with higher risks. This helps to balance out the profits and losses of different types of policies within the market, ensuring that overall the market remains profitable despite some policies generating losses. This is a common practice in insurance markets and helps to ensure that everyone has access to coverage regardless of their level of risk. Pooling refers to the act of bringing together different groups of policyholders, while a separating equilibrium and screening both refer to situations where an insurance market is able to distinguish between low-risk and high-risk policyholders and offer different types of policies to each group. While these concepts are related to cross-subsidization, they do not necessarily describe the same phenomenon.

In an Insurance Market,________ Occurs When One Type of Policy