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

Which policy feature is primarily designed to reduce moral hazard rather than adverse selection?

A deductible is aimed at moral hazard because the policyholder shares every loss and so keeps an incentive to take care. Medical exams, risk rating, proposal-form questions and waiting periods address hidden risk at inception, which is adverse selection.

  1. AA pre-policy medical examination
  2. BRisk-based premium rating at application
  3. CA deductible (excess) borne by the policyholder on each claimCorrect
  4. DA waiting period before certain pre-existing conditions are covered
  5. Questions on the proposal form about prior claims

Explanation

A deductible makes the insured bear part of each loss, restoring an incentive to take care after cover begins, which addresses moral hazard. The other options are underwriting tools applied before or at inception to deal with hidden risk, i.e. adverse selection.

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