An Insurance Company Is Likely to Attract Customers Like Clancy

question 96

Multiple Choice

An insurance company is likely to attract customers like Clancy, who wants to purchase insurance because he knows better than the company that he is more likely to make a claim on a policy.What is the term used to describe the situation above?

• A)Moral hazard
• B)Adverse selection
• C)Asymmetric information
• D)Economic irrationality

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Definitions:

ASPE

The Accounting Standards for Private Enterprises (ASPE) is a set of accounting standards for private companies in Canada, providing guidelines on financial reporting practices.

Accrual Basis

An accounting method where revenues are recorded when earned, and expenses are recorded when incurred, regardless of when cash is exchanged.

Net Income

The net income of a business once all costs and taxes are subtracted from its total earnings.

Cash Basis

The cash basis is an accounting method where revenues and expenses are recognized only when cash is received or paid, as opposed to when they are incurred.