Final answer:
The premium the insurance company should charge cannot be determined without knowing the probabilities of failure or moderate success. Adverse selection is a key concept where higher-risk individuals are more likely to buy insurance, potentially leading to unsustainable losses for insurers if premiums are not appropriately calculated.
Step-by-step explanation:
The CEO is looking to buy insurance to cover the losses of marketing a new product, with possible losses of $900,000 for a complete failure and $350,000 for moderate success. The question does not provide probabilities for these events, so it's not possible to calculate an expected value and thus determine the break-even premium the insurance company should charge. However, if we had probabilities, the premium would be determined by multiplying each potential loss by their respective probabilities and then summing those products to find an expected loss that the premium would need to cover.
Understanding adverse selection is important in this scenario. It can cause issues in the insurance market as those most likely to suffer a loss are the primary buyers of insurance, while those with a low probability of loss opt out. This is illustrated by the example with 100 drivers, where the insurance company set a premium at $1,860 to cover the average loss, discouraging lower-risk drivers from purchasing insurance and leading to unsustainable losses for the insurer.