Final answer:
In the context of insurance, concealment by an applicant can allow the insurer to void the policy. Insurance requires accurate risk assessment, and non-disclosure affects this process, creating potential moral hazard and adverse selection.
Step-by-step explanation:
Concealment, whether intentional or unintentional, on the part of an applicant or insured, permits the insurer to void the insurance contract. This is due to the lack of transparency that may significantly affect the risk being insured against.
Insurance fundamentally operates on the principle of shared risk, where premiums from insured individuals cover potential claims. For this balance to be maintained, insurers must have accurate information to assess risks properly. If an insurer discovers concealment, it typically has the right to terminate the policy because it entered into the agreement based on inaccurate or incomplete information, which can constitute misrepresentation and affects the actuarially fair premiums.
Moral hazard and adverse selection are two significant concerns in the insurance industry. Moral hazard occurs when the act of being insured leads to riskier behavior, as the insured party feels protected from the consequences. Adverse selection refers to the scenario where individuals with a higher likelihood of claims are more inclined to purchase insurance, potentially leading to financial imbalance for the insurer. Both these issues underscore the importance of full disclosure by the insured to avoid issues with concealment.