CAT Question of the Day Answer the question based on the passage given below. Adverse selection is when you do business with people you would be better off avoiding. This is one of two main sorts of market failure often associated with insurance. The other is moral hazard. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer; in particular, insurance will often not be profitable when buyers have better information about their risk of claiming than does the seller. Ideally, insurance premiums should be set according to the risk of a randomly selected person in the insured slice of the population (55-year-old male smokers, say). In practice, this means the average risk of that group. When there is adverse selection, people who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying. In this case, premiums set according to the average risk will not be sufficient to cover the claims that eventually arise, because among the people who have bought the policy more will have above-average risk than below-average risk. Putting up the premium will not solve this problem, for as the premium rises the insurance policy will become unattractive to more of the people who know they have a lower risk of claiming. Which of the following measures can help reduce adverse selection in insurance? - Make the purchase of insurance compulsory.
- Greater regulation to limit medical underwriting used by insurers.
- Greater regulation to prevent insurers from excluding pre-existing conditions or risks.
- Giving insurers all the tools available to adjust premiums based on each individual's inherent risk.
| OPTIONS | | |  | 1) | All of the above | | | 2) | None of the above | | | 3) | B and C only | | | 4) | A and D only |
Tip of the Day For a fixed perimeter, the area of a regular polygon with higher number of sides will always be more than the area of a regular polygon of lesser sides. So, if an equilateral triangle, square, regular pentagon, regular hexagon have the same perimeter, then their order of areas will be: Equilateral triangle < Square < Regular pentagon < Regular hexagon. Last year's Question of the day (29-Jul-12) For how many integral values of y, y4 + 4 is a perfect square of a prime number?
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