Homework 2 - 1. Adverse selection impacts both the...

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1. Adverse selection impacts both the insurer’s ability to charge, and the insured’s ability to pay a fair premium because with held information sways the underwriting process. Many people withhold information from insurance companies because they fear that their premiums will rise. This initially costs insurance companies money because the set premium is based on the idea that all groups are alike and are medium risk which is not always the case. The high risk insured group benefits from the initial premium because they are receiving coverage based on limited information whereas the low risk group is over paying for the riskier groups. All parties are not equally satisfied. If the insurance company had full knowledge of the high risks group’s risks from the beginning, the premium would be set at a price that would satisfy all parties. The insurance company sustains more risk when adverse selection is present within a risk pool. The insured benefits because they are receiving benefits at a cheaper premium
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This note was uploaded on 04/21/2011 for the course RISK MANAG 2101 taught by Professor Drennan during the Spring '07 term at Temple.

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Homework 2 - 1. Adverse selection impacts both the...

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