Which of the following best describes how adverse selection affects the price of insurance?
A)Since insurers can acquire complete information regarding the riskiness of borrowers,they can charge actuarially fair premiums.
B)Since firms may have private information about how risky they are,insurers must raise premiums to compensate for the existence of this uncertainty.
C)Since purchasing insurance reduces the firm's incentive to avoid risk,insurers must raise premiums to compensate for the increase in risk.
D)Since purchasing insurance reduces the firm's risk,insurers can lower premiums to compensate for the reduction in risk.
E)Since high premiums will drive away the low-risk firms,insurers must lower premiums in order to attract low-risk borrowers.

Question

Quizplus · Accepted Answer

Adverse selection occurs when firms with a higher risk of loss are more likely to purchase insurance. This means that insurers are left with a pool of borrowers who are more likely to file claims, leading to higher costs for the insurer. In order to compensate for this uncertainty, insurers must raise premiums to ensure they cover their expected costs.

Which of the Following Best Describes How Adverse Selection Affects