BU353 Lecture Notes - Lecture 8: Insurance, Moral Hazard, Adverse Selection
Document Summary
Chapter 5: insurability of risk, contractual provisions and legal. Pooling reduces risk and more people are risk-averse. At the same time, some losses are fundamentally uninsurable: risks that are highly correlated across insureds, risks that are difficult for the insurer to price, risk that are under the control of insured, moral hazard. The happening, timing, and cost of a loss can clearly be determined. A large number of similar exposures exist. Loss is fortuitous fro(cid:373) i(cid:374)sured"s poi(cid:374)t of (cid:448)ie(cid:449: fortuitous, out of control of insured, sudden and unexpected. Eve(cid:374) ee(cid:373)i(cid:374)gly (cid:862)i(cid:374)sura(cid:271)le losses(cid:863) may be diffi(cid:272)ult to i(cid:374)sure. Factors that limit insurability of risk and increase premiums include: size of loading administrative and capital costs, moral hazard, adverse selection. If the (cid:272)ost of pro(cid:448)idi(cid:374)g i(cid:374)sura(cid:374)(cid:272)e relati(cid:448)e to the size of loss (cid:894)(cid:449)ithout i(cid:374)sura(cid:374)(cid:272)e(cid:895) is (cid:862)too high(cid:863), the(cid:374) i(cid:374)di(cid:448)iduals and corporations may prefer to self insure and/or purchase less coverage.
