Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured.In other words, the automobile insurance market is subject to

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Moral hazard occurs when individuals alter their behavior in a way that increases the likelihood of a loss occurring after being insured. In the case of automobile insurance, individuals who engage in reckless driving or take less care on the road after being insured are creating more risk for the insurance company. This is a classic example of moral hazard. Asymmetric information refers to situations where one party has more information than the other, and adverse selection refers to the tendency for high-risk individuals to be more likely to seek insurance. Market signaling refers to the use of certain behaviors or actions to communicate information to the market. None of these concepts accurately describe the situation with automobile insurance and reckless driving.

Automobile Insurance Companies Have a Problem with People Who Buy