Question

How does compulsory insurance prevent the worst of adverse selection?

a) By allowing individuals to opt out of coverage
b) By requiring everyone to have coverage, spreading risk
c) By setting premiums based on health status
d) By encouraging risk selection by insurers

Answer 1

Compulsory insurance prevents adverse selection by requiring everyone to have coverage, which spreads the risk across a larger pool of individuals.

Step-by-step explanation:

Compulsory insurance helps prevent adverse selection, which is the tendency for high-risk individuals to seek insurance coverage more than low-risk individuals. This is achieved through option b) by requiring everyone to have coverage, spreading the risk. When everyone is required to have insurance, the risk is spread across a larger pool of individuals, which helps to balance out the costs and prevent insurance companies from only attracting high-risk individuals.