Adverse selection in insurance requires that
A)all people face the same risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are risk averse
D)insurers can tell higher risk people from lower risk people

Question

​Adverse selection in insurance requires that
A)​all people face the same risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are risk averse
D)​insurers can tell higher risk people from lower risk people

Quizplus · Accepted Answer

Adverse selection occurs when individuals who perceive themselves to be at higher risk are more likely to purchase insurance, while those at lower risk are less likely to do so. This phenomenon relies on the fact that people are risk averse, meaning they prefer to avoid uncertainty and potential losses, leading those who anticipate higher risks to seek insurance more actively than those who anticipate lower risks.

​Adverse Selection in Insurance Requires That

Adverse Selection in Insurance Requires That