Question

What is the potential risk when an illiterate woman with little or no earned income asks for a term plan with a high sum assured?

a.

Moral hazard

b.

Adverse selection

c.

Investment risk

d.

Both a and b

Posted under IC22 Life Insurance Underwriting

Answer: (d).Both a and b Explanation:An illiterate woman with little or no earned income asking for a term plan with a high sum assured is a high-risk scenario for the insurance company. There is a potential for both moral hazard and adverse selection. Moral hazard refers to the possibility that the insured person may engage in riskier behavior knowing that they are protected by insurance. Adverse selection refers to the tendency for higher-risk individuals to apply for insurance more frequently than lower-risk individuals. In this scenario, the combination of a high sum assured and the lack of financial resources or education on the part of the applicant increase the potential for both moral hazard and adverse selection.

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Q. What is the potential risk when an illiterate woman with little or no earned income asks for a term plan with a high sum assured?
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