Identify the FALSE statement.

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Identify the core ideas behind each statement and check them against standard insurance concepts.
Option 1: 'Fully insured drivers tend to take more care when driving, and therefore have a lower risk of an accident, than uninsured individuals.' This mixes up moral hazard with risk-reducing behavior. In many insurance theories, having full insurance can reduce the incentive to avoid risk because the insured party bears less of the cost of an accident. As a result, insured drivers may not necessarily have a lower risk; in fact, their risk could be higher due to diminished motivation to take precautions. So the claim that fully insured drivers take more care and have lower risk contradicts the typical moral hazard effect and is not supported by standard findings.
Option 2: 'An insurance policy that requires a driver to pay a deductible in the event of an accident only provides partial insurance.' A deductible means the policyholder pays a portion of the loss up to the deductible amount, with the insurer covering the remainder beyond that threshold. This introduces partial sharing of risk. Whether one labels this as 'partial insurance' depends on interpretation, but in common terms a deductible reduces the out-of-pocket cost and the insurer does not indemnify the full amount of a loss. Thus describing the policy as providing partial insurance is a defensible characterization.
Option 3: 'The 'fair price' for an insurance policy does not account for the insurance company's cost of doing business.' The actuarial or 'fair price' concept typically refers to expected losses covered by the policy, excluding loadings for administrative costs, profits, marketing, and other operating expenses. Therefore, this statement correctly notes that fair price omits those company costs.
Option 4: 'Insurance premiums are typically higher than the 'fair price'.' Since premiums usually include loading for administrative costs, overhead, profit, risk margins, and other business expenses, they are generally higher than the pure actuarial expected loss (the fair price). This aligns with standard pricing practice.

In summary, option 1 stands out as inconsistent with the conventional understanding of moral hazard and risk compensation, while options 2, 3, and 4 align with common interpretations of deductible effects, fair price definitions, and premium loadings. The analysis of each choice highlights the reasoning and common misconceptions that can lead to incorrect conclusions in questions about insurance concepts.

Managerial and Business Economics （12quiz Quiz 11: Decision-making under uncertainty

Identify the FALSE statement.

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