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Answer: Moral hazard is the primary risk for life insurance companies
**Correct answer: A** - **Moral hazard** is the main concern **after** insurance is purchased, because the insured may take fewer precautions or file larger claims once covered. - For **life insurance**, the primary risk is usually **adverse selection**: people who know they have a higher probability of death are more likely to buy more coverage. - **Adverse selection** happens **before** purchase and results from **asymmetric information**. - **Deductibles** help reduce moral hazard by making the insured retain part of the loss, encouraging more careful behavior. So statement **A** is false.
Author: Manit Arora
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Q-21.5.1. In regard to the key risk types, each of the following statements is true EXCEPT which is false?
A
Moral hazard is the primary risk for life insurance companies
B
Adverse selection occurs before insurance is purchased and is a risk that is enabled due to an asymmetric information problem
C
Moral hazard occurs after insurance is purchased and is a material risk for health and property-casualty (P&C) insurance companies
D
Insurance companies reduce their moral hazard risk with policy deductibles
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