Income Protection Insurance Assessment Essay Example | Topics and Well Written Essays - 750 words

Income Protection Insurance Assessment - Essay Example Adverse selection is often referred to as hidden information problem in the market, where for instance, sellers may know more about a product than a customer. In the case of Mr. Farid and Prudent Insurance, Mr. Farid faced different probabilities of his insurable event occurring, some at least under his control. Prudent Insurance, therefore, assumed Farid was either a low risk or high risk of the insured event happening. However, it could not individually classify Mr.Farid. Therefore when he fell sick, Prudent Insurance ascertained truth by sending him a claims form. This was in an attempt to solve the problem of adverse selection. I would not approve Mr.Farid’s claim for insurance for income protection. Mr. Farid had a heart valve disorder and this had the potential to present problems in future. It is an element of risk that I could not afford to look as an underwriter. By accepting his application claim, it means Mr.Farid had the motive of using this policy to claim for healthcare expenses. In other words, there was an element of moral hazard. Prudent Insurance should deny the claim. The reason Mr. Farid could not work a year after taking cover was that of his state of poor health. This was due to the heart valve disorder. This disorder was not covered in the policy given to Mr. Farid and thus, he could not claim. Also, the claims form indicates Mr. Farid spent less than an hour on the activities of lifting and carrying heavy items. These two had the biggest risk compared to driving and climbing ladders. Information about Mr.Green’s earlier convictions are important in determining the underwriting decision in that, if it is a restriction by the company, then Mr. Green did not act in good faith to inform the insurance of his past criminal activities. Though he was asked in the application form, he claims to have stated it orally to the broker, a fact the broker denies.