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SECTION 1 (10 MARKS) The insurance industry is one of the areas which have been highly disrupted by the emergence of artificial intelligence. For example, the underwriting process, which involves assessing the risk of insurance applicants and determining whether to provide insurance, has been predicted to become significantly faster as machine and deep learning models, powered by a dramatic increase in consumer data, facilitate the automation of the process. Question 1 [Max 200 words, 4 marks] Discuss how the use of artificial intelligence in the underwriting process could affect the relationship between the insurer and the insurance applicants. Your explanation must refer to the following: incomplete contracts asymmetric information Question 2 [Max 150 words, 3 marks] Consider Mariam who is a graduate underwriter in a major insurance firm. Recently, she has been hearing increasingly often about rival insurance firms automating their underwriting process. She has also heard a rumour that the management of her firm is looking to reduce the size of her underwriting team and create a large team of data scientists with expertise in artificial intelligence, who will develop the automated underwriting process. Discuss how this recent information about the insurance industry and Mariam's firm would affect her incentive to supply effort at work. Question 3 [Max 150 words, 3 marks] It turned out that the rumour was true. Soon, the management of Mariam's firm announced its restructuring decision. In addition, the firm also announced that it is to acquire a few smaller insurance firms in near future. Discuss the effect of these decisions (expected by the management) on its production cost and market power. Your discussion must refer to economies of scale elasticity of demand

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