Suppose an Insurance Company Has Estimated That 20 Percent of All

Multiple Choice

Suppose an insurance company has estimated that 20 percent of all of its potential policy owners are high- cost and sets a price for their insurance policy with the understanding that 20 percent of its policy owners will be high- cost. If the true percentage of high- cost potential policy owners is 40 percent, the insurance company is likely to face _______.

A) the bad apple problem
B) adverse selection
C) moral hazard
D) the principal- agent problem