In insurance markets, adverse selection often

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Adverse selection eliminates exchange possibilities that would be beneficial to both consumers and insurance companies alike. This is because those who are more likely to make a claim are also more likely to purchase insurance, which causes insurance companies to raise premiums or limit coverage, leading to a reduction in the number of people who can afford insurance. Thus, adverse selection leads to a negative spiral in which only the high-risk consumers purchase insurance, which creates losses for insurance companies, which leads to higher premiums and a further reduction in the number of consumers who can afford insurance.

In Insurance Markets, Adverse Selection Often