To reduce their disadvantage due to buyers having private information, auto insurers try to
A)raise the price of all policies.
B)collect information from customers that relate to how costly the customer will be to the insurer.
C)create incentives for buyers to be high-cost buyers so that they will pay more for insurance.
D)reduce the costs of providing insurance.

Question

Quizplus · Accepted Answer

By collecting information from customers that relate to how costly the customer will be to the insurer, auto insurers can better price their policies based on the risks associated with each individual policyholder. This helps to reduce the disadvantage they face due to buyers having private information about their own risk factors. Option A is not the best choice as it may lead to overcharging low-risk customers, which can result in losing their business to competitors. Option C is not a feasible approach as it encourages adverse selection, causing higher costs for the insurer in the long run. Option D, reducing costs, may help the insurer to offer lower premiums, but it doesn't address the information asymmetry problem.

To Reduce Their Disadvantage Due to Buyers Having Private Information