To state: The use of deductibles.
Answer to Problem 5MCQ
The correct option is b, i.e., deal with moral hazard.
Explanation of Solution
A deductible is defined as a sum stated in an insurance policy that the insured persons must pay before being reimbursed for a claim; a deductible is an instrument used by the insurance company to reduce moral hazard.
Moral hazard rises when individuals have more knowledge about their actions than others. This results in the falsification of incentives to apply or to take care of effort when someone else tolerates the costs of the lack of effort or care.
Insurance companies manage moral hazard by using a deductible: they reimburse for losses only above an assured amount, so that coverage is always less than 100%.
For example, in the case of car insurance, the insured has to pay for repairs after the first $800 in the loss. So, this means that an insensitive driver who gets collides with another vehicle will end up paying $800 for repairs even if it is insured, which gives at least some reason to be careful and reduces the moral hazard.
Introduction:
Moral hazard rises when individuals have more knowledge about their actions than others. This results in the falsification of incentives to apply or to take care of effort when someone else tolerates the costs of the lack of effort or care.
A deductible is defined as a sum stated in an insurance policy that the insured persons must pay before being reimbursed for a claim; a deductible is an instrument used by the insurance company to reduce moral hazard.
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