(Solved):Explain how the insurance market both have an adverse selection and a moral hazard problem. View Answer…

 

Question

Explain how the insurance market both have an adverse selection and a moral hazard problem.

 

EXPERT ANSWER

Moral Hazard:

Moral hazard occurs when the insured person takes on more risk knowing they will be covered by the insurer. An example would be someone taking more physical risk such as the risk of a broken bone. This results in more risk being taken that the insurer expected.

Adverse Selection:

The insurer whether it be auto or

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