Question

_ is the tendency of people with a higher-than-average chance of loss to seek insurance at standard rates.

a) Morale hazard
b) Adverse selection
c) Hazardous selection
d) Anti-selection

Answer 1

Adverse selection is the correct answer, indicating a situation where individuals with a higher chance of loss seek insurance at standard rates, leading to potential imbalances in the insurance system.

Step-by-step explanation:

The correct answer to the question is b) Adverse selection. Adverse selection is the tendency of those with a higher-than-average chance of loss to seek insurance at standard rates, which can strain the insurance system. It occurs when individuals have more knowledge about their risk levels than the insurance company does. As a result, those who are high-risk are inclined to procure more insurance than would otherwise be appropriate if their true risk levels were known to the insurer. This issue can lead to an imbalanced insurance pool with more high-risk individuals, ultimately driving up costs and premiums for the insurance company and other policyholders.