When a life-long chain smoker attempts to purchase a life insurance policy,the insurance company faces the problem of adverse selection.

Question

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Adverse selection occurs when individuals who are more likely to experience negative events (such as death) are more likely to purchase insurance. In the case of a life-long chain smoker, they are more likely to have health issues and a shorter life expectancy, which means they are a higher risk for the insurance company to insure. This is an example of adverse selection.

When a Life-Long Chain Smoker Attempts to Purchase a Life