Part 1If casualty insurance companies provided fire insurance without any restrictions, what kind of moral hazard LOADING... problem might result?Part 2
A. Customers would take less preventive care in avoiding fire risk with this type of insurance B. Insurance premiums would likely be lower with no need for deductibles C. With no restrictions, individuals would likely engage in less risk-taking behaviour with this type of insurance D. High-risk customers (for example, fireworks manufacturers) would seek this type of insurance

Question

Part 1If casualty insurance companies provided fire insurance without any​ restrictions, what kind of moral hazard LOADING... problem might​ result?Part 2
A. Customers would take less preventive care in avoiding fire risk with this type of insurance B. Insurance premiums would likely be lower with no need for deductibles C. With no​ restrictions, individuals would likely engage in less​ risk-taking behaviour with this type of insurance D. ​High-risk customers​ (for example, fireworks​ manufacturers) would seek this type of insurance

BlackTom AI · Accepted Answer

This question explores moral hazard in casualty insurance, specifically fire insurance, and asks which scenario would result if there were no restrictions on coverage.
Option A: 'Customers would take less preventive care in avoiding fire risk with this type of insurance.' This is a classic moral hazard concern: when people are insured, they may feel shielded from losses and thus reduce their preventive efforts, increasing the likelihood of a fire occurring. The reasoning here is that insurance coverage can dampen the perceived cost of risky behavior, leading to lax safety measures. This option aligns with well-established economic theory on moral hazard in insurance contexts.
Option B: 'Insurance premiums would likely be lower with no need for deductibles.' While removing restrictions could affect premiums, the direct moral hazard issue is not about premium level or deductibles per se, but about changes in behavior after coverage is in place. This statement focuses on pricing mechanisms rather than behavioral responses, and it ignores the core moral hazard dynamic that insured individuals may neglect prevention.
Option C: 'With no restrictions, individuals would likely engage in less risk-taking behaviour with this type of insurance.' This is the opposite of moral hazard. Without restrictions, the incentive problem is that people may take more risks, not less. Therefore, this option contradicts the standard moral hazard effect where coverage reduces the marginal cost of risky actions, encouraging more risk-taking.
Option D: 'High-risk customers (for example, fireworks manufacturers) would seek this type of insurance.' While it’s plausible that high-risk segments might seek coverage, moral hazard focuses on changes in behavior due to insurance, not on who seeks insurance. This statement describes adverse selection or risk pooling concerns rather than the behavioral change after obtaining insurance, so it does not directly address the stated question about moral hazard.
Overall, the reasoning points toward option A as the scenario that most directly illustrates moral hazard arising from unrestricted fire insurance coverage, since it captures the reduction in preventive behavior that ethical insurance designs typically aim to counteract with deductibles, premiums, and policy limits.

Homework:Chapter 10 Homework

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