The Purpose of Automobile Insurance, and Its Influence on Risky Behavior

Topics: Insurance, Moral hazard, Economics Pages: 2 (380 words) Published: November 4, 2011
Explain the purpose of automobile insurance and examine the extent to which automobile insurance does encourage risky behavior. The purpose of automobile insurance is to repair or replace damages caused by hazardous situations. Insurance can give a motorist a sense of freedom from financial distress. Unfortunately insurance does encourage risky behavior. Knowing that you personally may not have to incur cost repairing another person’s vehicle may sway risky driving practices. Speaking for myself, when I dropped my insurance to liability I was more cautious to my surroundings. I drove slower and was hesitate before pulling out in front of other cars.

Many professional athletes purchase insurance against career-ending injuries. Would you expect the insured players to act differently from those who don’t have insurance. Yes, I would expect insured players to act differently from those who weren’t insured. An athlete’s body is symbolic to their livelihood. Their careers consist of physical activity. Insured athletes would play harder and take chances. They would not be bound to the issues of injuries.

Use the notion of adverse selection to explain a classic quip from Groucho Marx: “I won’t join any club that is willing to accept me as a member.” I surmise the meaning behind this phrase is does the benefit outweigh the cost. Being a part of something gives a person a sense of gratification. Your status goes from individual to group. A person is no longer judged by his or her actions, but whether the actions of the club. An accepted member may feel pride by being chosen, but is also disdaining by the fact that they would be losing their individuality.

Scientists have recently developed new genetic tests that could be used by an insurance company to determine whether a potential customer is likely to develop certain diseases. Discuss the tradeoffs associated with allowing insurance companies to use these tests. First of all, the...
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