Insurance Task Part1: Income protection Insurance (IPI) How Information Asymmetry May Lead To Adverse Selection Information asymmetry refers to untrustworthy or private ideas set to favor ones interest prior to the company’s interest. In terms of insurance, adverse selection describes a situation where an individuals demand for insurance is not correlated with the individuals risk of loss. Therefore, the insurer is unable to insure the loss. Information asymmetry may lead to denial of insurance payment, this is clearly evidenced whereby Mr. Farid filled claim report policy was cancelled and payment denied by the insurer.
This was due to overestimation of hours spent on each activity and some details in the initial application form did not match the letter. Therefore, the insurer felt lack of truthfulness in Mr. Farid. Would you approve Mr. Farid’s application? No. This is because the information presented in the claim form is not genuine. Its comparison with initial information given while applying for insurance does not match. When applying for Income Protection Insurance, he said he was a company director, and his work was inspecting construction sites, training workers in health and safety awareness and was not involved in any manual or outdoor activities yet in claim report policy he includes manual and outdoor activities such as lifting and carrying of heavy items. Should payment be done or not The claim should be paid but after correction of the form by ensuring it contains genuine information.
This will ensure information asymmetry is not present in any way, and the insurer will be able to pay for the loss. Part II: Household Items Insurance Effects of Mr. Green’s Earlier Convictions with Insurer Some of the information was lacking, the non-monitoring convictions statement was not filled; hence, the insurer could not insure it because it was not in the insurance policy.
Insurance policy is a legal agreement between a person and an insurer on terms and conditions of what is being insured against, any exclusions, the payment incase a person rises the claim and the cost of policy or premium. Owing to this, the insurer did not trust Mr. Green, after finding that information, insure felt Mr. Green was trying to hide some information therefore, he was not genuine. Solution for the dispute between Mr.
Green and the insurer 1. Information withheld in relation to adverse selection Lack of complete filling of client form was a major cause of adverse selection, insurer feelings was Mr. Green was hiding some information and did not want to disclose it. This is not true because lack of complete filling was due to ignorance or human mistake. Since Mr. Green upholds he released the information to the broker and broker denies, there is the possibility that the broker is not genuine.
Insurance brokers are not employed by the insurer, but to help a person get a better deal, and therefore, insurance broker must be licensed. Therefore, insurance broker is to be blamed and not Mr. Green, therefore, insurer should pay him accordingly. 2. Industry Practice Regarding Incomplete Client Forms The insurance company should make sure clients forms are fully filled before acceptance of the insurance policy. They should also assist client in filling the forms especially in areas where they do not understand. Similarly, cases involving brokers should be thoroughly looked at to deal with untrustworthy brokers who act maliciously to clients. Reference Insurance.
(2008). What Is Insurance? Retrieved on November 24, 2011 from: