Which of the following is an example of adverse selection?
A)A homeowner with a large fire insurance policy allows the wiring in her house to deteriorate.
B)A woman with a large life insurance policy takes up sky diving.
C)Your brother-in-law borrows $20,000 from you to open a pizza parlor, but spends it gambling at the racetrack instead.
D)A man with a bad heart condition buys a large life insurance policy.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, particularly in insurance or lending markets. In this case, a man with a bad heart condition buying a large life insurance policy is an example of adverse selection because he has more information about his health risk than the insurance company. This can lead to a higher risk of claim that the insurance company did not account for when pricing the policy.

Which of the Following Is an Example of Adverse Selection