IMG_0919.jpeg

# Insurance Market Analysis The document discusses the challenges of maintaining a profitable insurance business when faced with adverse selection. ## 1. Initial Situation - **Solidarity:** Insurers collect premiums from all policyholders, regardless of their individual risk levels, to cover cla...

# Insurance Market Analysis The document discusses the challenges of maintaining a profitable insurance business when faced with adverse selection. ## 1. Initial Situation - **Solidarity:** Insurers collect premiums from all policyholders, regardless of their individual risk levels, to cover claims. This means that good-risk policyholders pay for the bad-risk policyholders' claims. - **Information Asymmetry:** Policyholders usually know more about their own risk than the insurer. This difference in knowledge leads to potential problems. Insurers often do not have complete accurate information about the risks involved with the policyholder. ## 2. Persistent Bad Risks - **Risk Retention:** If good-risk customers decide not to renew a policy or to refuse new policies due to unsuitable terms, the remaining customers are mostly bad risks. - **Cost Increase:** When a substantial portion of good-risk clients leave, costs for insurers usually rise. - **Premium Increase:** Insurers may respond by increasing premiums to maintain profitability. - **Adverse Selection:** When good-risk individuals reject insurance because the premiums are too high, only high-risk individuals remain. ## 3. Unaffordable Insurance - **Claim Payment Problems:** Claim payouts may consistently exceed premiums collected, eventually leading to substantial financial losses for insurers. - **Financial Consequences:** Potential consequences for insurers include decreased profits, insolvency, and ultimately, business closure. The document visually represents this concept through diagrams of people smoking and a graph representing declining revenue.