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

Which measure would an insurer most plausibly use to limit adverse selection in individual term life insurance?

Underwriting with medical evidence and rating premiums by assessed risk tackles adverse selection, because it narrows the information gap between applicant and insurer before cover starts. No-claims discounts and coinsurance mainly address moral hazard after the contract begins.

  1. AOffering a no-claims discount
  2. BRequiring the insured to retain a coinsurance share of each claim
  3. CUnderwriting using medical evidence and rating premiums by assessed riskCorrect
  4. DCancelling policies after each claim
  5. Paying claims only in instalments

Explanation

Adverse selection arises from hidden information about risk at the time of purchase. Underwriting with medical evidence and risk-differentiated premiums reduces that information gap. Discounts and coinsurance mainly address moral hazard behaviour after cover starts.

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