Skip to content

IAI Actuarial Core Principles · Economic Modelling · Role of insurance in reducing or removing risk

An insurer introduces a fixed excess on a health policy. Which is the most direct reason this mitigates moral hazard?

An excess makes the policyholder bear part of every loss, so they keep a financial incentive to avoid losses and not make trivial or inflated claims. This reduces moral hazard, although it does not remove adverse selection or the need for underwriting.

  1. AIt removes the insurer's need to underwrite applicants
  2. BIt guarantees that only low-risk individuals buy cover
  3. CIt lets the insurer charge a premium equal to expected claims with no loading
  4. DIt makes the insured bear part of each loss, preserving the incentive to avoid or limit lossCorrect
  5. It transfers all risk to the reinsurer

Explanation

An excess means the policyholder pays the first part of any loss. This keeps a financial stake in avoiding losses and in not making trivial or inflated claims. It does not remove underwriting or guarantee low-risk buyers.

Did you get it right without looking?

One question tells you little. A timed set on Role of insurance in reducing or removing risk shows your real accuracy, how long you take and where you lose marks.

Practise Role of insurance in reducing or removing riskFree diagnostic mock

More Role of insurance in reducing or removing risk questions