Safe Times Insurance requires a medical examination for all applicants for medical insurance. Those with significant preexisting conditions are charged more. This is an example of:

• A. Moral hazard
• B. Adverse selection
• C. Signaling
• D. Screening

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'Screening': Screening is a strategy used by one party to gather information about another party. In this context, Safe Times Insurance uses medical examinations to screen applicants and determine their health status.
2. Differentiate between 'Screening' and 'Signaling': While screening involves the insurer actively seeking information, signaling would involve the applicants providing information voluntarily to indicate their health status.
3. Consider the role of 'Adverse Selection': Adverse selection occurs when one party in a transaction has more information than the other, typically leading to a situation where those most likely to need insurance are the ones who apply for it. Screening helps mitigate this issue by providing the insurer with more information.
4. Examine 'Moral Hazard': Moral hazard refers to the change in behavior of the insured party after obtaining insurance, such as taking more risks because they are covered. This is not directly related to the initial screening process.
5. Conclude why 'Screening' is the correct answer: Safe Times Insurance uses medical examinations to gather information about applicants' health, which is a classic example of screening to prevent adverse selection and ensure appropriate pricing of insurance policies.