Final answer:
The economic problem in the EveryProvince's story is adverse selection, a situation where high-risk individuals are more likely to seek insurance, creating an asymmetric information problem for insurers who can’t perfectly identify risk levels. This leads the insurance company to increase premiums to cover the potential additional risks. Similar issues also include moral hazard, where individuals take greater risks because they are insured.
Step-by-step explanation:
The economic problem described in the story of EveryProvince, a vehicle insurance provider that recently began offering classic car insurance, is known as adverse selection. Adverse selection occurs in markets where there is asymmetric information between buyers and sellers, resulting in high-risk individuals being more inclined to purchase insurance since they have more insight into their actual risk level compared to the insurance company.
Unable to perfectly distinguish between high-risk and low-risk classic car owners, EveryProvince decided to set higher premiums for classic car insurance to mitigate the risk posed by those who are likely to engage in riskier behaviors on the road, such as vintage car races.
The issues of moral hazard and adverse selection both emerge from the challenges of classifying insurance buyers into proper risk groups when one party holds more information about the risk than the other. Insurance is a means of sharing risk, and moral hazard arises when insured individuals have less incentive to avoid risks because they are protected by insurance.