Final answer:
The answer is a) True, as insurance is essentially a risk management tool meant to provide financial protection against unforeseen events, with the hope that such events never occur. Insurance involves paying premiums for compensation of covered losses, but imperfect information can lead to moral hazard and underinsurance issues.
Step-by-step explanation:
Insurance coverage indeed offers a benefit that policyholders hope never to claim, which means the correct answer is a) True. The purpose of insurance is to protect against financial losses from unpleasant events, such as accidents or health issues. Policyholders pay premiums to form a pool from which those who suffer covered losses are compensated. In practice, being insured may lead to moral hazard, where individuals take fewer precautions against risks because they are insured. Moreover, those who have insurance may find themselves underinsured, where medical expenses or deductibles consume a significant portion of their income, showing that having insurance does not always equate to adequate coverage.
Imperfect information is an inherent problem in the insurance industry. Insurers might struggle to collect accurate data on an individual's risk level, such as a person's complete health history or how safely someone drives. An actuarially fair insurance policy is one where the premiums paid match the average benefits a person in that risk category would expect to receive. Adjustments in premiums to cover high-risk individuals can lead to insurance becoming too costly for low-risk individuals, which could result in them opting out of insurance coverage altogether, exacerbating the issue of underinsurance.