A good way to deal with moral hazard faced by an insurance company would be to:
A)fully indemnify its policy holders.
B)require applicants to take a physical examination.
C)require policy holders to pay a deductible.
D)conduct detailed investigations of every accident.

Question

Quizplus · Accepted Answer

Requiring policy holders to pay a deductible helps to mitigate moral hazard by making the policy holder have some financial investment in their own safety and well-being. It reduces the incentive for the policy holder to take unnecessary risks or engage in reckless behavior that could result in a claim being filed on their policy. Fully indemnifying policy holders could actually increase moral hazard, as the policy holder would bear no personal financial responsibility for their actions. Requiring physical examinations or conducting detailed investigations may help to identify pre-existing conditions or fraud, but they do not directly address moral hazard. Requiring policy holders to pay a deductible helps to reduce moral hazard by making them more careful about filing claims and only using insurance for larger losses. This way, individuals are partly responsible for the cost of the loss and therefore have an incentive to avoid making frivolous or unnecessary claims.

A Good Way to Deal with Moral Hazard Faced by an Insurance