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    Asymmetric Information: Moral Hazard

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    Introduction: You are the representative of an insurance company and have been asked to recheck the application of Mr. Andrew Smith. Mr. Andrew Smith has taken an insurance policy for all the members of his family. Mr. Andrew Smith suffers from a genetic disorder that afflicts all members of his family. The disorder affects the lungs and can cause sudden death if the person indulges in a strenuous physical activity or exercise. At the moment, the entire family is in good health and no one in the neighborhood is aware of this malady. Mr. Andrew Smith has not disclosed any information about this genetic disorder to the insurance company.

    Task: Discuss whether this act amounts to a moral hazard. If not, under what circumstances can it be termed as moral hazard? Begin the discussion as follows:
    ?Discuss at least two acts that can be included in moral hazard.
    ?Discuss the circumstances in which any act becomes a moral hazard.

    Build your responses based on the following:
    ?Possible safeguards to avoid a moral hazard.
    ?At least two ill effects of a moral hazard.

    Thank you.

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    Solution Preview

    The response addresses the queries posted in 414 Words, APA References

    Moral Hazard: Effects & Safeguards

    Moral Hazards

    Moral Hazard is a condition or possibility under which a particular party separated from the risk behaves differently from the situation in which it was exposed to the risk fully. The Moral Hazards are generated, when a party becomes careless about the actions and leave the responsibility of the consequences of those actions on another party (Williams, 1999). For example, in an Act, the owner of a car becomes less alert to lock the vehicle and is careless about theft, as the negative consequences of the theft would be borne by the insurance company of his car. In another act, some people after making fire insurance, become ...

    Solution Summary

    The response addresses the queries posted in 414 Words, APA References