Suppose that inexperienced drivers are less likely to have an automobile accident than experienced drivers. As a result, insurance companies charge lower insurance premiums for inexperienced drivers. Suppose one insurance company decided to charge inexperienced drivers and experienced drivers the same premium based on the average risk of an accident among both groups. Using your knowledge of the problems associated with asymmetric information, explain whether you think this insurance company will be profitable.
This insurance company is (Click to select)likelyunlikely to be profitable because of the problem of (Click to select) moral hazardadverse selection. The insurance premium based on the average risk of an accident among both inexperienced and experienced drivers will be (Click to select)lowerhigher than the premium for experienced drivers alone and (Click to select)lowerhigher than the premium for inexperienced drivers alone. Therefore, (Click to select)inexperiencedexperienced drivers will not choose to be insured by this company but (Click to select)experiencedinexperienced drivers will. The premium charged based on the average risk of inexperienced and experienced drivers (Click to select)wouldwould not be sufficient to cover the claims of (Click to select)an inexperienced-onlyan experienced-only driver pool and so the company (Click to select)wouldwould not be profitable.