The concept “adverse selection” regard to Kenya

Question 1

Explain the concept “adverse selection” and with specific regard to Kenya, discuss any four circumstances/choices that qualifies adverse selection in the insurance industry.

Adverse selection: refers to market process in which ‘bad’ results occur due to information asymmetries between buyers and sellers, where the ‘bad’ products or customers are more likely to be selected. In insurance, it describes a situation where as a result of private information the insured are more likely to suffer a loss than the uninsured. A key condition for there to be adverse selection generally arises when one does business with people of whom he/she have no knowledge about.
It also refers to a situation where one party in a contract or negotiation, such as seller, possesses information relevant to the contract or negotiation that the corresponding party such as buyer, does not have. The asymmetrical information leads the party taking information to make decision that cause it to suffer adverse effects.
In the insurance industry, it refers to situations in which an insurance company extends insurance coverage to an applicant where actual risk is substantially higher than the risk known by the insurance company. The insurance company suffers adverse effects by offering coverage at a cost that does not accurately reflect its actual risk exposure. The insured gains insurance at a cost that is below his/her true level of risk. Insurance company can protect themselves against adverse selection through; accurately identifying risk factor, or can put in systems for verifying information and or placing caps on coverage.
Circumstances/choices that qualifies adverse selection in the insurance industry include;
A smoker who gets insurance as a non-smoker. The applicant’s smoking habits or tobacco increase the risk occurrence chances because smokers tends to have shorter lives because of their health problems, therefore making them a higher risk to the insurance company. A smoker getting insurance as a non-smoker will pay less premiums that his/her actual risk and the insurance company extends its in insurance coverage due to lack of information and thus making it suffer adverse effects.
A person works in dangerous/hazardous occupation who gets insurance as a person working in normal fair conditions is an example of adverse selection. This is because the insurer will charge him/her less premiums but will incur higher cost for the coverage. This is because that the insurance company lacks information on the hazardous working conditions of the insured which increases the risk to the insurer.
An applicant obtaining an auto insurance coverage based on providing a residence address in an area with a very low crime rate when he/she actually lives in an area with a very high crime rate is a circumstance qualifying for an adverse selection. The risk of an area with a high crime rate is substantially higher/greater than if the vehicle owner lives in a low-crime area. This is because high crime rate will increase the chances of the vehicle being stolen and the insurance company due to lack of information, will charge the applicant low premiums for a low crime area and when the risk occurs, the insurance company suffers loss.
A person who get insurance for his vehicle that is parked in a busy street daily as a vehicle parked in a garage daily is an example of adverse selection. The applicant obtains coverage at a lower premium than the insurance company would charge if it were aware of the applicant’s actual risk that the vehicle is parked daily on a busy street. The busy street increases the risks to the insure and on its occurrence, the insurance company suffers loss.
 

If liability insurance is not mandatory for the auto driver, will you still purchase it? Explain

             Yes
Liability insurance provides the insured party with protection against claims resulting from injuries and damage to people or property. Liability insurance policies cover both legal costs and any payouts for which the insured party would be responsible if found legally liable; with an exception of international damages and contractual liabilities. It is critical to a person who may be held liable for injuries to others, or in the event the insured party damages someone else’s property and is considered to be at fault. Auto driving can be prone to accidents causing damages and or injuries making the owner/driver being sued but if he was insured, then the liability insurance would protect him against those claims. This is because the owner of the vehicle (auto driver) has obtained a personal liability insurance and payed for covered losses and damages sustained third parties, along with related legal costs.
Additionally, auto liability insurance coverage will ensure my monetary interests by covering both the property (vehicle) damage and bodily injury I caused in the accident, as sustained to the third party. Not only are my monetary assets protected in the case of an accident, but my plan is relatively inexpensive because not all parties involved in an auto accident are content with repairs alone, and therefore auto liability insurance coverage will save me from getting entangled in the greedy fingers of insurance agencies and other drivers who may want a hefty payout for an accident that resulted in nothing more than a scratch on the rear bumper of the car. With auto liability insurance coverage, your agency protects your assets.
 
Question 2
Did Statewide and Wambui have an enforceable agreement? Discuss
No
The Statewide claims services and Wambui did not have an enforceable agreement. This is because for an agreement between two or more parties to be valid and enforceable, it must have the essentialities of the general contract. These essentialities include;
Agreement (offer and acceptable): the offer for entering into a contract comes from Wambui proposing to Statewide claims services, so that she can get “all the insurance money that Mr. Muia had under his insurance policy”. Wambui invites Statewide into the offer but Statewide responds by demanding Wambui to “place money in an escow account in regard to any and all liens pending”, something that Wambui refused. A valid and enforceable contract must have an offer and acceptable where one party offers a contract and the other accepts. This makes the Wambui and Statewide agreement unenforceable.
Legal consideration. Wambui refused to offer Statewide’s demand in return of the settlement offer. This makes Wambui and Statewide agreement unenforceable because for a valid contract agreement to be enforced, there must be a fixed payment of a sum or any valuable item in return of the cover/settlement.
Competence to contract. For a person to be competent to contract he/she must process the full characteristics; should be of a majority age, that is 18 years and above, who is of sound mind, and also not disqualified from contracting by any law to which he is subject. A minor is not competent to contract and therefore a contract by minor is void since they cannot sign contract. We are not told about the ages of Wambui and Statewide’s administrator whether they are minor or major. In case any of them was a minor then the agreement would be void and thus unenforceable. We are also not told about their minds and in case any of them was of unsound mind, the agreement would be unenforceable too.
Free consent. Parties entering into a content should enter into it by their free consent, but not caused by coercion, unduly influence, fraud, misrepresentation or mistake. The proposal for free consent must start with signing a declaration to this effect, and also the person explaining the subject matter of the proposal to the proposer must also accordingly make a written declaration on the proposal. Statewide, makes a written demand to Wambui who refuses it and thus, Statewide, who was to accept the offer does not make any declaration on the proposal from Wambui, thus making their agreement unenforceable.
Legal object. To make a valid contract that is enforceable, the object of the agreement should be lawful. The object must; be not forbidden by law, not be an immoral act, not be opposed to the public policy or one which defeat the provisions of the law. If the object or consideration is found be unlawful, the agreement is void. Wambui wrote to Statewide claims services asking for “all money that Mr. Muia had under his insurance policy.” Wambui’s injury could cost less than Muia’s total insurance money that he had and by this case, if granted, this would be an immoral act and asking for all Muia’s insurance money held without any considerations done defeats the provisions of the lwa and thus making their agreement void and unenforceable.
 
 
 
References
Mogens Steffensen. & Soren Asmussen (2019): Risk and Insurance; A Graduate Text.
Tony Boobier (2016): Analysis for Insurance; The Real Business of Big Data.
George Rejda;(1992) Principles of Risk Management and Insurance
 

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