A situation involving certain types of perils such as earthquakes and floods where only those people with high probabilities of loss will want to buy the coverage thereby violating the law of large numbers is called
A)unaffordable risk.
B)adverse selection.
C)the large-loss principle.
D)the risk of large numbers.

Question

Quizplus · Accepted Answer

This situation is known as adverse selection, where only the individuals at a higher risk of suffering a loss are likely to purchase the insurance coverage. This violates the law of large numbers, which states that insurance works because losses are distributed over a large pool of insured individuals. When only a small group of people with high probabilities of loss buy the insurance, the insurer's ability to spread the risk and predict future losses is compromised.

A Situation Involving Certain Types of Perils Such as Earthquakes