FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
Which feature of an insurance contract is primarily designed to reduce adverse selection rather than moral hazard?
A medical exam or detailed application questions before issuing life cover reduces adverse selection, because it lets the insurer learn about applicants' risk before pricing. Deductibles, coinsurance and no-claims bonuses act after the contract starts, so they address moral hazard.
- AMedical examination or detailed application questions before issuing life coverCorrect
- BA deductible on each claim
- CCoinsurance on each claim
- DA no-claims bonus that reduces future premiums
Explanation
Screening applicants before issuing the contract reduces the insurer's information disadvantage about who is buying, which is adverse selection. Deductibles, coinsurance and no-claims bonuses all influence behavior after cover starts, so they target moral hazard.
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