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 (300 words):
The insurance mechanism is fundamentally built on trust, mutual cooperation, and the assumption that people generally want to act ethically. This assumption underlies the principle of utmost good faith (Latin: uberrima fides), which is essential in insurance contracts. According to this principle, both the insurer and the insured are expected to disclose all relevant information truthfully and completely. For example, a person applying for health insurance is expected to provide accurate information about their medical history. The insurer, in turn, is expected to explain the terms, conditions, and coverage clearly.
If insurance systems assumed that people are always selfish or act in bad faith, the entire mechanism would become unworkable. It would be prohibitively expensive to verify every detail or prevent every possible instance of fraud. While fraud does exist, the system relies on the idea that most people act honestly, and only a small minority attempt to take unfair advantage.
This ethical assumption allows insurance companies to pool risks and provide financial protection to a large group of people. Everyone contributes premiums, and only those who suffer covered losses file claims. The trust that most people won’t abuse the system enables this shared-risk model to function efficiently.
Option (a) “Always put their own interests first” might sound logical in economics, but it is too cynical and not aligned with the collaborative nature of insurance.
Option (b) “Are inherently selfish” and (d) “Tend to act in bad faith” suggest a default assumption of dishonesty, which would undermine the foundation of the insurance contract.
Therefore, (c) “Generally want to act ethically” best reflects the underlying assumption of the insurance mechanism and aligns with the principle of utmost good faith central to Chapter 1 of most insurance textbooks.