On solving Problem #2 in Problem Set #6

Throughout this problem, there is adverse selection, but it turns out that MostStates’ entry in part C (into the market previously monopolized by Gecko in parts A-B) mitigates adverse selection somewhat, while also expanding risk management opportunities, particularly for the low and medium risk types. Solving this problem requires figuring out who purchases which policies and calculating the expected profit (or loss) per policyholder type in each of parts A, B, C, D, and E of this problem. Once you perform these calculations, then the average profit (or loss) per policy is simply the average loss per policy, based on which driver types purchase each policy.

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