Final answer:
Insurance applications must contain thorough disclosure requirements to enable insurers to evaluate the risks they are underwriting, which is challenged by issues of imperfect information. These requirements can include past health details for life insurance or driving history for car insurance. An insurance premium is a payment for the insurance policy based on assessed risk levels.
Step-by-step explanation:
Insurance applications must contain certain disclosure requirements which are essential to ensure that the insurer has sufficient information to undertake an evaluation of the risk they are insuring. This could encompass areas such as previous medical history for health insurance or driving record for car insurance. In particular, someone purchasing life insurance will likely know more about their own health history than an insurer could find out without intensive investigation. Similarly, a person buying car insurance might be aware that they are a high-risk driver, even if they have not had a major accident yet. Still, it is a challenge for the insurance company to ascertain an individual’s driving behavior accurately.
Insurance companies rely on truthful and thorough disclosure of information because of the inherent issues of imperfect information. Policyholders must accurately report their ethnicity and race for government monitoring purposes, especially in cases concerning loans for dwellings. Furthermore, an insurance premium is the amount of money an individual or business pays for an insurance policy, and this premium reflects the level of risk that the insurance company perceives based on the information provided.