The insurance mechanism is based on an assumption that people:(Search Chapter 1) ?a. ?Always put their own interests first. b. ?Are inherently selfish. c. ?Generally want to act ethically d. ?Tend to act in bad faith.
The correct answer and explanation is:
Correct Answer: c. Generally want to act ethically
Explanation:
The insurance mechanism is built on the principle of trust and good faith, which assumes that people generally want to act ethically. This foundational belief is essential for the functioning of insurance because it relies on the cooperation between insurers and insured parties to share risks effectively.
Insurance operates on the concept of risk pooling, where a large number of people contribute to a fund to protect against individual losses. For this system to work, the assumption is that most people will provide accurate information when applying for coverage and will file legitimate claims when they suffer a loss. Without this ethical basis, the system would collapse under fraudulent claims or widespread dishonesty.
Good faith, also known as uberrima fides, is a key principle in insurance. It requires both parties—the insurer and the insured—to act honestly and transparently. The insured must disclose all relevant information about the risk being insured, while the insurer must provide clear terms and conditions of the policy.
The assumption that people generally want to act ethically doesn’t mean there are no cases of dishonesty or fraud. However, such instances are considered exceptions rather than the norm. If the insurance system were based on the belief that people always act selfishly or in bad faith, it would require exhaustive verification processes and higher premiums, making it inefficient and unaffordable.
By trusting that most individuals value ethical behavior, insurers can design policies that are both accessible and sustainable. This trust also fosters a sense of community and responsibility among insured individuals, reinforcing the mutual benefits of risk-sharing. Therefore, the assumption that people generally act ethically underpins the effectiveness and fairness of the insurance system.