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Answer: Moral hazard is the primary risk for life insurance companies
**A is false.** - **Adverse selection** is the more important risk for **life insurance** because applicants may know more about their health or life expectancy than the insurer. - **Moral hazard** occurs **after** insurance is purchased and is especially relevant for **health** and **property-casualty (P&C)** insurance. - **Deductibles** help reduce moral hazard because the insured retains part of the loss. Therefore, the statement that moral hazard is the primary risk for life insurance companies is the false one.
Author: Manit Arora
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Question-21.5.1. Insurance is the quintessential risk transfer product. The customer pays premiums to the insurance company, who provides coverage by making a promise to pay (aka, the contingent payout) in the event of a covered loss. In addition to risk transfer, another key element of insurance is the pooling of the premium dollars: the insurance company is diversified with respect to the loss event type. Insurance is a legal contract and very broadly, the FRM categorizes insurance contracts as one of three types: life; property and casualty (P&C); or health insurance. (Although sub-categories of insurance dynamically emerge, to be sure!). 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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