Statistically, teenage drivers are more likely to have an automobile accident th

Question

Statistically, teenage drivers are more likely to have an automobile accident than adult drivers. As a result, insurance companies charge higher insurance premiums for teenager drivers. Suppose one insurance company decided to charge teenagers and adults the same premium based on the average risk of an accident among both groups. Using your knowledge of the problems associated with asymmetric information, explain whether you think this insurance company will be profitable.
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Source:ISBN: 007337590X | Title: Money, Banking and Financial Markets | Publisher: McGraw-Hill/Irwin

Explanation / Answer

Yes, because the increasing teenage accidents will lead to increased investing in insurance company but also increase awareness among teenagers..and reduces accidents, eventually it a profit situation

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