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Moral Hazard's Impact on Insurer's Expected Payoff Calculation
The standard formula for calculating an insurer's expected payoff, which subtracts the expected claim from the premium, relies on a specific probability of loss. However, this calculation is complicated by moral hazard. The presence of an insurance policy can change the policyholder's behavior, leading them to take fewer precautions. This behavioral shift increases the actual probability of a claim, meaning the probability is not a fixed parameter but is influenced by the insurance contract itself.
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Introduction to Microeconomics Course
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CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
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