A good way to deal with adverse selection faced by an insurance company would not 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)insure groups of individuals (such as all employees of a particular firm).

Question

Quizplus · Accepted Answer

Fully indemnifying policy holders would encourage adverse selection, as individuals who are more likely to file a claim would be more likely to purchase insurance. The other options all help to mitigate adverse selection by either gathering more information about the applicants' health (B), incentivizing policy holders to only file legitimate claims (C), or pooling the risk among a larger group of individuals (D). Fully indemnifying policy holders could attract high-risk individuals who are more likely to make claims, leading to adverse selection for the insurance company. The other options (B, C, and D) help the company mitigate adverse selection by either ensuring that only healthy individuals are insured (through physical examinations), encouraging policy holders to avoid small claims (through deductibles), or insuring groups of individuals (which reduces the risk of adverse selection as the group is likely to be diverse in terms of risk).

A Good Way to Deal with Adverse Selection Faced by an Insurance