Final answer:
Partial insurance does not achieve state-independence (b), and full insurance does not eliminate income uncertainty completely (e) are true. Other options contain misconceptions about actuarially fair contracts, income from insurance, and definitions of 'unfair insurance.' Understanding moral hazard and adverse selection is crucial in the context of insurance.
Step-by-step explanation:
To address the student's question regarding which statements are true concerning insurance contracts, let's evaluate each option:
- a. An insurance contract which yields negative profits is called unfair insurance. This is not necessarily true. An insurance contract that yields negative profits for the insurer may be considered unsustainable or a loss, but 'unfair insurance' is not a standard term for this situation.
- b. Partial insurance does not achieve state-independence. This statement is true. Partial insurance means that not all potential losses are covered, leading to different financial states in the case of a loss versus no loss.
- c. The individual who buys health insurance but never visits the hospital is always better off than he without health insurance. This statement is not always true; it depends on various factors such as the cost of the insurance versus the risk of needing care. The individual is better protected against risk, but if they never incur healthcare costs, financially they may not be better off than if they had foregone insurance.
- d. If the insurance is fair, the customer's expected income increases by buying the contract. This statement is false because in a fair insurance scenario, the premium paid by the customer should be equivalent to the expected benefit, which means their expected income would remain the same, not increase.
- e. Full insurance does not eliminate income uncertainty completely. This statement is true. While full insurance can minimize financial losses due to certain risks, it cannot account for all possible uncertainties that impact income, such as job loss or other unrelated financial issues.
- f. The price of an actuarially fair contract is zero. This statement is false. An actuarially fair contract means that the premium equals the expected payout, not that the contract is free.
Moral hazard and adverse selection are important concepts to understand when considering insurance. Moral hazard occurs when there is less incentive for those who are insured to avoid risks. Adverse selection describes a situation where those with high risk are more likely to purchase insurance, which can lead to market imbalance and potentially to the insurer withdrawing from the market altogether.