Question

please explain carefully

Which of the factors listed below may mitigate the problem of adverse selestion in insurance? a) Many factors influencing the probability of accident are observable. b) The insuree himselfherself knows exactly whether he/she is a low-risk type. g) Some types of insurance are compulsory. Persons characterized by a low probability of accident may be strongly risk-averse. At least three of the remaining answers are correct. e)

Answer 1

The correct answer is: d)

Reason: It is factually correct that persons with low probability of accident and risk-averse and are less likely to take insurance and hence, the converse of this i.e. persons high probability of accident are more likely to take insurance and thus cause the problem of adverse selection.

Thanks!