Jodyand Douglasare risk-averse and both own residential homes worth $1,000,000. Douglas’s home is brick construction and is located in the Mohave Desert. Jody’shome is wood construction and is located in the San Bernardino national forest. If all owners of $1,000,000 residential properties must pay the same premium for fire insurance, explain which consumer, Jody or Douglas, is more likely to buy home insurance?Does it imply a market failure problem for the insurance company and/or consumers of insurance?
Jody is more likely to buy fire insurance because she has a wooden house in the forest, which can easily catch fire in case of forest fires. Douglas has a brick house in the desert and so it is unlikely that his house will catch fire because deserts don't catch fire( and even if they could, the fire doesn't spread in a desert), also brick houses don't catch fire easily. So, Douglas is less likely to purchase fire insurance.
It would mean a market failure problem for the insurance company. Consumers like Douglas wouldn't be very interested in buying fire insurance for their homes as they face less risk of damage by fire; mostly people who face higher risk of fire would want to buy fire insurance. Since Jody is a high-risk customer, it is highly likely that customers like her will be in need of insurance, so insurance companies will charge a higher premium from all the homeowners who want to buy insurance to cover for the loss it would face from the high-risk buyers. Due to this, the other low-risk buyers who would want to purchase insurance ( but wouldn't like to pay high premiums) would be driven out of the market. The insurance company gets an 'adverse selection' of homeowners.
Further, since the high-risk customers would be charged the same premium as low-risk customers, high-risk customers might take less precautions/ care of their houses. This would cause a problem of 'moral hazard', where the company wouldn't be able to monitor the actions of the homeowners in taking adequate fire precautions for their homes.
Jodyand Douglasare risk-averse and both own residential homes worth $1,000,000. Douglas’s home is brick construction and...
Jody and Douglas are risk-averse and both own residential homes worth $1,000,000. Douglas’s home is brick construction and is located in the Mohave Desert. Jody’s home is wood construction and is located in the San Bernardino national forest. If all owners of $1,000,000 residential properties must pay the same premium for fire insurance, explain which consumer, Jody or Douglas, is more likely to buy home insurance? i.) Does your answer above imply a market failure problem for the insurance company...
Jody and Douglas are risk-averse and both own residential homes worth $1,000,000. Douglas’s home is brick construction and is located in the Mohave Desert. Jody’s home is wood construction and is located in the San Bernardino national forest. (1)If all owners of $1,000,000 residential properties must pay the same premium for fire insurance, explain which consumer, Jody or Douglas, is more likely to buy home insurance? (2)Does your answer in above imply a market failure problem for the insurance company...
Jody and Douglas are risk-averse and both own residential homes worth $1,000,000. Douglas’s home is brick construction and is located in the Mohave Desert. Jody’s home is wood construction and is located in the San Bernardino national forest. If all owners of $1,000,000 residential properties must pay the same premium for fire insurance, explain which consumer, Jody or Douglas, is more likely to buy home insurance?