ABC Appliance offers a warranty requiring an annual fee. The warranty

ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased.

The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC’s president said, “Buying a warranty is voluntary. We’ve noted that those who buy the warranty after the purchase date have a greater need for service.” Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?
A) excessive premiums
B) reduced claims
C) bad investments
D) adverse selection

ANSWER

Answer: D