Information Asymmetry & Moral Hazard in Insurance

An insurer can rarely tell a genuinely careful, low-risk customer apart from a genuinely accident-prone one — and once someone is covered, the insurer can't watch how carefully they behave either. This simulation puts both problems side by side: policyholders with a hidden risk type choose whether a community-rated premium is worth buying, which can trigger Akerlof-style adverse selection as low-risk types exit and the pool's risk climbs; meanwhile, coverage itself changes behaviour, since insured policyholders take less care and file more claims than their priced-in risk assumed. Adjust how much the insurer can actually observe, how strong the behavioural response to coverage is, and how much markup is charged, and watch the pool either stabilise or spiral.