Question

Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there are 11 named hurricane storms predicted for their coastal area this year. Sofie and the homeowner association members plan to increase their homeowner's property coverage limits to handle their concern about the possible hurricane damage. Their action is known as
Choose one answer.

A. Managing the book of business.
B. Adverse selection.
C. Misclassification.
D. Increasing capacity.

Answer 1

Answer:

(B). Adverse selection.

Explanation:

Adverse selection in insurance occurs when customers obtain insurance coverage based on certain information they possess about a potential risk, which the insurance company is usually not aware of. For example a person who does a dangerous job may want to purchase a disability insurance.

Sofie and the members of her homeowner's association, looking to increase their homeowner's property coverage limits, due to information they have about possible hurricane storms in the area, is an example of adverse selection.