medium · GMAT Verbal
Under the theory of adverse selection, when one party to a transaction has private information about their own risk level that the other party cannot easily observe, an insurance pool tends to attract a disproportionate share of higher-risk participants unless the insurer can screen for risk or higher-risk participants are otherwise deterred from opting in.
Which of the following scenarios would most likely mitigate adverse selection in a new voluntary dental-insurance pool?
- The insurer sets identical premiums for every enrollee and collects no risk information from applicants.
- The insurer requires a dental examination and health questionnaire before quoting a premium to each applicant.
- The insurer advertises the plan exclusively through channels most likely to reach people already experiencing dental pain.
- The insurer allows enrollees to join or cancel coverage at will with no minimum commitment period.
- The insurer promises to retroactively cover dental work completed in the six months before enrollment.
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