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

Which insurer response is aimed specifically at reducing adverse selection rather than moral hazard?

Pre-issue underwriting, such as a medical examination and questionnaire, targets adverse selection because it helps the insurer assess and price individual risk before cover starts. The other measures work by changing policyholder behaviour once insured, which is moral hazard.

  1. ARequiring a medical examination and questionnaire before issuing life coverCorrect
  2. BIntroducing a no-claims discount
  3. CAdding a co-payment on each claim
  4. DLimiting the sum insured to below the value of the asset
  5. Investigating claims for signs of exaggeration

Explanation

Underwriting through medical examination and questionnaires lets the insurer identify risk before issuing cover, addressing adverse selection. No-claims discounts, co-payments, sum-insured limits and claims investigation act on behaviour after cover begins, addressing moral hazard.

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