A consequence of adverse selection for the insurance market is that:
A) risk-seeking individuals typically pay higher premiums than risk-averse individuals.
B) everyone ends up paying higher premiums.
C) risk-averse individuals typically pay higher premiums than risk-seekers.
D) everyone ends up paying lower premiums.

Question

Quizplus · Accepted Answer

Adverse selection occurs when people with higher risk levels are more likely to purchase insurance than people with lower risk levels. As a result, insurers have a higher proportion of clients with higher risk, which leads to higher overall claims costs. To compensate for this, insurers raise premiums for everyone, including those with lower risk levels. Therefore, everyone ends up paying higher premiums.

A Consequence of Adverse Selection for the Insurance Market Is