Distinguish adverse selection from the moral hazard in the insurance market.
INSURANCE
Insurance is financial loss protection usually involving risk management and is provided by an entity known as an underwriter, insurer or an insurance company. On the other hand of insurance is a policymaker or the insured. The insured assumes a guarantee of compensation which is promised by the insurer in exchange to a less amount payment. The compensated loss by the insurer may not necessarily be financial but should the form that is reducible to finance in terms. The insurable interest is usually established by the possession, pre-existing ownership and ownership. The insurance contract known as the insurance policy is then presented to the insured. It contains the circumstances and the conditions on which the protected will receive compensation. Some amount of money is then paid to the insurer by the policyholder. The money spent is known as the premium. In case of a loss, the insured can submit claims for processing by the insurer by a claim adjuster where the insurer might decide to hedge the risk by reinsurance.
ANSWER
The main distinguishment between adverse selection and moral hazard is that the adverse selection is the case where the insured manages to attain a cheaper premium service than the insurance company’s cost charges. In contrast, moral hazard is generally the scenario where one’s engagement with the insurance a riskier than not being insured.
Reference
Mudgett, B. D. (1961). Insurance. New York: Alexander Hamilton Institute.