Which statement is TRUE if the insurance market is efficient?
A)The deductibles eliminate moral hazard.
B)Society as a whole engages in less risky behavior.
C)It transfers risk from those who most want to get rid of it to those least bothered by the risk.
D)Premiums are always kept to the level of a fair insurance policy.

Question

Quizplus · Accepted Answer

The efficient insurance market transfers risk from those who are risk averse (most want to get rid of it) to those who are risk neutral (least bothered by the risk). This is because those who are risk averse are willing to pay a premium to eliminate risk, while those who are risk neutral are willing to accept risk for a lower premium. This balancing of risk among market participants is one of the hallmarks of an efficient insurance market. A) is not necessarily true as deductibles can also create adverse selection. B) is unlikely as insurance can create moral hazard, incentivizing riskier behavior. D) is not necessarily true as premiums will fluctuate based on actuarial data and market conditions.

Which Statement Is TRUE If the Insurance Market Is Efficient