The ability of insurance to spread risk is limited by a. risk aversion and moral hazard. b. risk aversion and adverse selection. c. moral hazard and adverse selection. d. risk aversion only.

kvasilw0

kvasilw0

Answered question

2022-08-13

The ability of insurance to spread risk is limited by
a. risk aversion and moral hazard.
b. risk aversion and adverse selection.
c. moral hazard and adverse selection.
d. risk aversion only.

Answer & Explanation

Siena Bennett

Siena Bennett

Beginner2022-08-14Added 17 answers

Insurance companies can be held back by two main limiting factors: moral hazard and adverse selection.
1. People who get life insurance may start living a much more dangerous life because of the potential payout. This is considered moral hazard and limits insurance companies ability to spread risk evenly.
2. It is increasingly likely that sick people are going to be the ones purchasing health insurance compared to healthy people. This is referred to as adverse selection and also impedes insurance companies from properly spreading risk
Result:
c. moral hazard and adverse selection

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