Question

The reason why most flood insurance policies have a waiting period (30 days for the NFIP) before coverage is effective is to reduce:

a) Adverse selection
b) Moral hazard
c) Antiselection
d) Risk pooling

Answer 1

The reason why most flood insurance policies have a waiting period (30 days for the NFIP) before coverage is effective is to reduce adverse selection.

Step-by-step explanation:

The reason why most flood insurance policies have a waiting period (30 days for the NFIP) before coverage is effective is to reduce adverse selection.

Adverse selection occurs in insurance markets when riskier individuals buy insurance, but less risky individuals do not.

If only sick(er) people buy insurance, it becomes extremely expensive. By implementing a waiting period, insurance companies can ensure that individuals are not waiting until they know they will need coverage to purchase a policy, which helps to mitigate adverse selection.