Final answer:
The insurance company faces a scenario of adverse selection. Careless drivers will be disproportionately represented in the buyer pool, leading the company to potential losses due to inadequate premium pricing.
Step-by-step explanation:
The issue described involves concepts of adverse selection in the insurance market, where risk cannot be perfectly classified. When an insurance company charges based on an average probability of an accident, individuals who are more likely to have accidents (the careless group) will find the premium more attractive compared to the careful group, whose members have a lower probability of having an accident. When an insurance company cannot identify who is in the careful and careless group but knows the probability of an accident for each group, it charges a premium based on the average probability of an accident.
In this case, it is most likely that the share of buyers who are in the careless group will be disproportionately higher. The insurance company will charge a higher premium to account for the higher risk associated with the careless group.As a result, the market share of the careless group will increase. Over time, this could lead to a situation where the insurance company incurs losses, as the premiums collected will not cover the higher than expected claim payouts.