Moral Hazard In Insurance Industry

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RISK MANAGEMENT&INSURANCE ASSIGNMENT III STUDENT NO: 872853 INTRODUCTION The purpose of this paper is to discuss the reasons of why insurance coverage is so limited and the insurable risk characteristics. According to K. Arrow (1971) the insurance market failure is coursed poor risk bearing ability which result to limited insurance coverage. The major issue that causes limitation to insurance coverage is uninsurable risk, for the risk to be insurable it must have certain characteristics such that it must be pure risk not speculative. 1. WHY INSURANCE COVERAGE SO LIMITED? In most cases poor risk bearing ability which result to limited insurance coverage is caused a variety of factors such as limited in scope, limited as to…show more content…
Moral hazard causes market failure in the insurance industry based that they include asymmetry information problem, which requires that insurer to try implement strategies that going to reduce moral hazard issue. In process of reducing moral hazard problem the insurer introduce deductibles, retrospective, experience rating which affect both high and low risk insured’s. Low risk and innocent insured’s end up leaving the market because high premiums that caused by the implementation of monitoring moral hazard that caused by high risk insured’s (Rejda, 2001). LACK OF REINSURANCE SUPPORT FOR INSURANCE COMPANIES Reinsurance system purpose is to spread or share the risk among insurance companies. In case of spread risk across the wider base of exposure, the insurance industry share risk equal, for insurance industry to be solvency and efficient. Pooling losses as group contribute in reducing uncertainty loss by increase the number of members in the pool. If the insurance industry is unable to spread or manage risk it consider as market failure that causes companies to leave the insurance market because of lack of support in…show more content…
In many cases the insurance companies tend to abuse the duty of disclosure to their advantage by demanding that before you receive cover you must going for certain examination such as medical examination, past insurance records, life history. Regulation cause limits towards insurance coverage for people who have bad records history and those who deemed to be medical unfit. 2. WHAT ARE THE FUNDAMENTAL CHARACTERISTICS OF AN INSURABLE RISK? Usually pure and particular event risks are insurable while speculative and fundamental event risks are not insurable. There are five common characteristics of insurable risks: The risk must be measurable in financial terms, the probability of loss must be fortuitous, large number of homogenous losses and risk must be diversifiable. PURE AND PARTICULAR

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