Related to the Economics in Practice on page 356: Insurance companies are interested in being legally allowed to obtain the results of genetic testing before deciding on issuing insurance policies to potential buyers, which would lessen the problem of ________ in the health insurance market.
A) moral hazard
B) market signaling
C) adverse selection
D) risk-loving

Question

Quizplus · Accepted Answer

Adverse selection is the tendency of those in the worst health conditions to be more likely to purchase insurance, leading to an imbalance of risk for insurance companies. If insurance companies were allowed to obtain the results of genetic testing, they would be able to more accurately assess the risk of potential buyers and adjust premiums accordingly, reducing the problem of adverse selection. Moral hazard refers to the tendency for insured individuals to take more risks because they are covered by insurance. Market signaling refers to the use of certain actions or characteristics to signal information to the market about one's level of risk. Risk-loving refers to an individual's willingness to take risks.

Related to the Economics in Practice on Page 356: Insurance