When Do Insurance Companies Encounter the Problem of Moral Hazard

question 51

Multiple Choice

When do insurance companies encounter the problem of moral hazard?

• A) When simply having insurance causes people to take more risks than they would otherwise.
• B) When they do not have enough information to distinguish between people who are "good risks" and those who are "bad risks."
• C) When the price of insurance premiums fully reflects all available information.
• D) When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously.

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Definitions:

Foreign Exchange Market

A global marketplace for trading national currencies against one another, instrumental in setting exchange rates.

American Manufacturer

A company based in the United States that produces goods for sale, contributing to the domestic economy.

Euros

The official currency of the Eurozone, which is used by many of the European Union's member states.

Bretton Woods System

A monetary management system established in 1944 that set up rules for commercial and financial relations among major countries, including fixed exchange rates and the creation of the International Monetary Fund (IMF) and World Bank.