Describe the two key consequences, to the health insurance industry, of this fact that the companies know less about individuals’ health than the individuals who buy the policies do.

The problem of asymmetric information is a major issue in the market for health insurance. Insurance companies must be able to predict the amounts they will have to pay out to policyholders in order to set premium levels that are neither too low to cover costs or too high to be acceptable to customers — but the insurance companies don’t have the same level of knowledge about customers’ state of health that the customers have themselves. Describe the two key consequences, to the health insurance industry, of this fact that the companies know less about individuals’ health than the individuals who buy the policies do.

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