Adverse selection in insurance implies that
A)all people face the same risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are not risk averse
D)insurers cannot tell the risk levels that different individuals face

Question

​Adverse selection in insurance implies that
A)​all people face the same risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are not risk averse
D)​insurers cannot tell the risk levels that different individuals face

Quizplus · Accepted Answer

Adverse selection in insurance means that insurers cannot tell the risk levels of different individuals, and potential customers who face higher risks are more likely to purchase insurance. This results in insurers being left with a pool of customers who are more likely to make claims, leading to higher costs for the insurer and potentially higher premiums for everyone. Option A and C are incorrect because adverse selection implies that people do face different levels of risk, and that they are risk averse (which is why they are seeking insurance in the first place). Option B is incorrect because adverse selection actually means that those facing more risk are MORE interested in purchasing insurance.

​Adverse Selection in Insurance Implies That

Adverse Selection in Insurance Implies That