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Unformatted text preview: 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. One way to reduce adverse selection is to make the purchase of insurance compulsory, so that those for whom insurance priced for average risk is unattractive are not able to opt out. MORAL HAZARD • One of two main sorts of MARKET FAILURE often associated with the provision of INSURANCE . The other is ADVERSE SELECTION . Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for....
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- Summer '06
- Economics, Adverse selection, insurance premiums