Question

An agent tells an insured that if he replaces his current insurance policy with a newer one, his dividends will be higher and his premiums will be slightly lower. The policy, however, would not offer either one of these things. What type of misrepresentation is being committed?

Answer 1

An agent committing fraud by falsely promising higher dividends and lower premiums in a new insurance policy is engaging in fraudulent misrepresentation. This is particularly problematic due to imperfect information and the risk of moral hazard in insurance markets.

Step-by-step explanation:

When an agent misrepresents the benefits of a new insurance policy, claiming it will offer higher dividends and lower premiums than it actually does, they are committing an act of fraudulent misrepresentation. This type of misrepresentation occurs in the insurance industry when there is imperfect information, and the agent provides false information to persuade the insured to switch policies. This not only breaches ethical guidelines but also can have legal consequences. Ensuring accurate information is critical since insurance is fundamentally about sharing risk, and moral hazard is already a concern in these markets due to insured parties having less incentive to avoid risk.