1.An insurance company is considering issuing three types of fire insurance policies:?
1.An insurance company is considering issuing three types of fire insurance policies: (i) complete insurance coverage, (ii) complete coverage above and beyond a EUR10,000 deductible, and (iii) 90 percent coverage of all losses. Which policy is most likely to create moral jeopardy problems? Why?
Answers:
The complete insurance coverage is most likely to create moral hazard problems. The idea for this is simple. In the other two policies, an insured person will still be liable for a part of the ruin.
When you have a complete coverage, you don't have to take-home pay for any of the damage. So you don't really have a motive to prevent fires from occuring. This will result within people behaving slipshod when it comes to firesafety.
You can observe the same workings with comprehensive insurance policies in sports car insurance. Studies prove that people with a comprehensive vehicle insurance cause a lot more accident than people without a comprehensive sports car insurance. Even if you take into account that associates who are worse drivers will be more likely to get a comprehensive coupé insurance (because they have more to gain from such an insurance), this effect still remains to exist. This is also clearly a case of moral jeopardy.
Related Questions:
Answers:
The complete insurance coverage is most likely to create moral hazard problems. The idea for this is simple. In the other two policies, an insured person will still be liable for a part of the ruin.
When you have a complete coverage, you don't have to take-home pay for any of the damage. So you don't really have a motive to prevent fires from occuring. This will result within people behaving slipshod when it comes to firesafety.
You can observe the same workings with comprehensive insurance policies in sports car insurance. Studies prove that people with a comprehensive vehicle insurance cause a lot more accident than people without a comprehensive sports car insurance. Even if you take into account that associates who are worse drivers will be more likely to get a comprehensive coupé insurance (because they have more to gain from such an insurance), this effect still remains to exist. This is also clearly a case of moral jeopardy.
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