Insurance Deductibles as a Screening Mechanism
Insurance companies can use deductibles as a screening device to sort customers by their risk level. By offering a menu of policies—for example, one with a high deductible and low premium, and another with a low deductible and high premium—the insurer induces customers to reveal their private information. Cautious, low-risk individuals are more likely to choose the high-deductible plan to save on premiums, while higher-risk individuals are more willing to pay the higher premium for better coverage. This self-selection helps the insurer mitigate the problem of adverse selection.
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Insurance Deductibles as a Screening Mechanism
Insurance Deductibles as a Screening Mechanism