Discuss the concept of adverse selection in insurance and ways to reduce this risk.

Question

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The Answer is Adverse selection occurs when individuals who are more likely to take risks and, hence, to receive insurance benefits are the ones who are most likely seek out insurance. Since insurance is based on the theory of pooling risks, pools of individuals with varying risks are needed to be able to have funds available for those needing payouts for adverse events. To reduce adverse selection risk, insurance firms often offer better rates for group insurance, such as everyone working in a business, to avoid adverse selection problems. Other ways to reduce this risk include lower premiums for individuals with lower risks to entice them to be in the insurance pool (i.e., such as non-smokers, individuals with excellent safety records, and reductions for taking precautions).

Discuss the Concept of Adverse Selection in Insurance and Ways