Consider some of the steps taken by insurance companies to control their adverse selection and moral hazard problems. Give two examples of how insurance companies control adverse selection. Give two examples of how insurance companies control moral hazard. Be specific to the type of insurance and the steps taken.

In all cases below we will be looking at health insurance.

Solutions to Adverse Selection:

Heath insurance firms can require two thing as solutions. The first is a health assessment by a doctor they contract to assess your health based on a number of tests or observations in person. The second is to require you to disclose all previous medical history. These both increase the information the insurer has and thus reduces the information gap which helps solve adverse selection.

Solutions to Moral Hazard:

Health insurance firms can implement a deductible and coinsurance. Coinsurance has the insured take on some of the cost of their risk. A deductible makes the insured responsible for small claims while larger ones that include the possibility of death already have a built in incentive to reduce risk.