BU353 Lecture Notes - Lecture 5: Moral Hazard, Small Claims Court, Uberrima Fides
Document Summary
Chapter 5: insurability of risk, contractual provisions, and legal doctrines. Factors limiting the insurability of risk: premium loadings, moral hazard, adverse selection. Arises because insurance changes a person"s incentive to take precautions. Arises when policyholders are better informed about expected claim costs than insurers: premium loadings. As the loading increases, the quantity of coverage demanded is likely to decrease; any factor that increases administrative or capital costs will limit the amount of private market insurance coverage. Items with low value and severity are more likely to be insured if they are bundled together with other exposures due to the fixed costs associated with underwriting and distributing an individual policy. When the probability of a loss is high, insurance is less likely to be provided, and expected claim costs are high which causes admin costs to be high as well. When losses are highly correlated across potential policyholders, the variance of the distribution of average losses will also be high.
