Long-term care insurance companies worry about "adverse selection" because:
A. They know that long-term care claims are on a "first come-first serve basis."
B. The possibility that people who "know" they will use long-term care services can disproportionately buy it and drive up use beyond expectations.
C. They owe no matter who buys coverage.
D. It automatically assigns priority to those who need services most.
Answer (2)
Long term care insurance companies are concerned about adverse selection because individuals who know they will need care are more likely to purchase insurance, leading to higher-than-expected claims. This creates an imbalance in the risk pool, driving costs up significantly. The phenomenon can severely impact the sustainability and pricing of insurance products. ;
Long-term care insurance companies worry about adverse selection because individuals anticipating the need for care are more likely to purchase insurance, which can lead to an overrepresentation of high-risk individuals in the insurance pool. This raises claims costs above expectations and complicates pricing strategies. The correct answer is B: The possibility that people who know they will use long-term care services can disproportionately buy it and drive up use beyond expectations.
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