Insurance market is characterized by failures that impose particular negative consequences; given the failures, different remedies may improve the market outcome. On one hand, the insurance market is characterized by asymmetric information, i.e. moral hazard and adverse selection, and to correct the consequent severe market failures, monitoring and risk classification can be implemented. On the other hand, the insolvency issue: given the enormous amounts of funds in the hands of insurance companies, their default would have an extreme impact, and regulation is necessary to guarantee the payback for policyholders and beneficiaries.
Moral Hazard Asymmetric Information Insurance Market Adverse Selection Risk Classification
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