FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
An insurer wants to reduce moral hazard in a property policy. Which feature most directly does this by making the policyholder share each loss?
A coinsurance clause most directly reduces moral hazard because the policyholder pays a share of every loss and therefore keeps an incentive to prevent losses. Geographic pooling diversifies the insurer's risk but does not change the insured's behavior, and uniform premium rises do not tie cost to care.
- AA coinsurance clause requiring the insured to pay a percentage of each lossCorrect
- BHigher premiums for all customers regardless of risk
- CAnnual statistical review of the loss ratio
- DPooling of policies across many regions
Explanation
Coinsurance and deductibles keep the insured's own money at stake, which encourages care. Pooling across regions diversifies risk but does not change incentives. Uniform higher premiums do not link cost to behavior.
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