Which of the following methods reduce adverse selection in insurance markets?
I. selling insurance policies to groups of employees in a firm
II. requiring medical exams for anyone purchasing life insurance
III. denying insurance coverage to people with preexisting health conditions
IV. mandating by law that all people must buy health insurance
A) I, II, III, and IV
B) I and III
C) III
D) I and II

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, typically leading to a market failure. In insurance markets, this happens when those most likely to need insurance are more inclined to buy it, potentially driving up costs and leading to a less efficient market. Selling insurance policies to groups (I) can reduce adverse selection by pooling a wide range of individuals, not just those who anticipate needing insurance. Requiring medical exams (II) helps insurers assess risk more accurately, pricing policies in a way that reflects the actual risk. Denying coverage to people with preexisting conditions (III) directly limits the ability of those most likely to use insurance from purchasing it, although this practice is controversial and restricted in many jurisdictions. Mandating insurance for all (IV) spreads the risk across a broader population, including those less likely to use the insurance, thus mitigating the impact of adverse selection.

Which of the Following Methods Reduce Adverse Selection in Insurance