Adverse selection occurs in the insurance market because:
A) the seller has more information than the buyer.
B) the buyer has more information than the seller.
C) both the buyer and the seller have incomplete information.
D) Any of these could be the cause of adverse selection in insurance market.

Question

Quizplus · Accepted Answer

Adverse selection occurs in the insurance market because the buyer has more information than the seller. This means that those who are more likely to make claims, such as those who engage in risky behaviors, are more likely to purchase insurance. As a result, insurance companies must raise premiums to compensate for the increased risk, which can discourage low-risk individuals from purchasing insurance.

Adverse Selection Occurs in the Insurance Market Because