Adverse selection occurs when those most likely to get insurance payoffs are the ones who want to purchase the insurance the most.

Question

Quizplus · Accepted Answer

Adverse selection is a phenomenon in insurance markets where individuals who are more likely to make claims (i.e., those with pre-existing conditions or who are engaged in riskier behaviors) are more likely to purchase insurance. This creates a problem for insurers as they have to charge higher premiums to cover their expected losses, which can lead to further adverse selection as healthier individuals opt out of purchasing insurance.

Adverse Selection Occurs When Those Most Likely to Get Insurance