Which of the following best describes how moral hazard affects the price of insurance?
A)Since insurers can acquire complete information regarding the riskiness of borrowers,they can charge actuarially fair premiums.
B)Since firms may have private information about how risky they are,insurers must raise premiums to compensate for the existence of this uncertainty.
C)Since purchasing insurance reduces the firm's incentive to avoid risk,insurers must raise premiums to compensate for the increase in risk.
D)Since purchasing insurance reduces the firm's risk,insurers can lower premiums to compensate for the reduction in risk.
E)Since high premiums will drive away the low-risk firms,insurers must lower premiums in order to attract low-risk borrowers.

Question

Quizplus · Accepted Answer

Moral hazard refers to the tendency of individuals or firms to take on more risk when protected by insurance. This increased risk-taking leads to higher losses for insurers, which in turn causes them to raise premiums to compensate. Therefore, Option C is the best choice because it correctly describes how moral hazard affects the price of insurance by stating that insurers must raise premiums to compensate for the increase in risk when firms purchase insurance, thereby reducing their incentives to avoid risk.

Which of the Following Best Describes How Moral Hazard Affects