Question

Joshua, a customer representative, is discussing policy details with his client, Barbara. While reviewing the current policy, Joshua notices an important gap in Barbara's coverage that could leave her open to significant financial loss. However, because Barbara does not mention it, he decides not to bring it up for discussion. Which of the following is TRUE?

Option 1: Joshua is acting ethically by respecting Barbara's decision not to discuss certain aspects of her policy.
Option 2: Joshua should report the gap in coverage to his supervisor, ensuring that Barbara's financial interests are protected.
Option 3: It is acceptable for Joshua not to mention the coverage gap since Barbara did not specifically ask about it.
Option 4: Joshua should recommend additional coverage without disclosing the coverage gap to avoid causing concern for Barbara.

Answer 1

Joshua should ethically disclose the coverage gap to his client Barbara, as withholding this information could lead to significant financial loss and breaches professional standards. Both adverse selection and moral hazard present challenges in the insurance industry, necessitating transparency and accurate risk assessment by insurance professionals.

Step-by-step explanation:

Joshua should not recommend additional coverage without disclosing the coverage gap to Barbara. As a customer representative, it is his ethical obligation to inform Barbara about any significant gaps in her coverage that could lead to a financial loss. The scenario given represents an ethical dilemma in the insurance industry, where professionals must balance the risk of adverse selection and moral hazard with the need for transparency and trust in client relationships.

Adverse selection occurs when an individual with more knowledge of their risk profile purchases insurance, potentially leading to a higher risk than the insurer anticipated. On the other hand, moral hazard describes situations where insured individuals may take higher risks knowing they have coverage. Insurance professionals must work to minimize these issues through accurate risk assessment and clear communication. Failing to disclose important coverage gaps compromises the integrity of the insurance market and violates professional standards.