Adverse selection occurs when one party has an information advantage over the other party. In the case

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Adverse selection occurs when one party has an information advantage over the other party. In the case of insurance, people taking out insurance know more about their health and lifestyle than the insurance company. Therefore, in order to reduce information asymmetry, the insurance company asks prospective customers to complete a medical questionnaire and/or submit to a medical examination. Knowing the health risks associated with the people taking out insurance allows the insurance company to better adjust the premiums that it charges. For example, the premium for smokers is higher than for nonsmokers.Some people are subject to genetically inherited health problems, such as Alzheimer’s disease, ALS, and Huntington’s disease. Huntington’s, for example, is an incurable degenerative brain disorder that affects about 1 in 10,000 people. Children of a parent who has Huntington’s have a 50% chance of inheriting the disease.


Questions

1. Do you consider it to be unethical for insurance companies to charge high-risk people a higher premium than low-risk people?

2. Are insurance companies acting responsibly when they require customers to disclose medical information and/or submit to a medical examination?

3. Argue either in favor of or opposed to Senator Cowan’s proposed legislation. 

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Business And Professional Ethics

ISBN: 9780357441886

9th Edition

Authors: Leonard J Brooks, Paul Dunn

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