\"Moral Hazard\" Please respond to the following: In 2020, a leading insurance c

Question

"Moral Hazard" Please respond to the following: In 2020, a leading insurance company started a policy that pays a policy holder a 5 percent rebate on their insurance premium in a year in which the policyholder does not file an insurance claim. For example, a household with an annual premium of $1,200 will get a $60 rebate check each year it does not file a claim. Identify what problem(s) the insurance company is trying to solve by introducing this policy. Determine whether the above policy benefits the insurance company or the policy holder. Provide support for your response.

Explanation / Answer

The policy will benefit both, the company and the policy holder. It has kill a moral hazard in this sector where the policy holders are almost careless because they already have insurance to cover the costs. The price (premium) is also lower, and so is the cost. It also causes positive externalities. If there is no accident, it will not risk to lose life. Productivity will increase. In fact, the government should provide the subsidy

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