The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

Question

Quizplus · Accepted Answer

Adverse selection occurs when individuals who are most likely to file a claim or have a higher risk of loss are more inclined to purchase insurance. This results in a pool of insured people who are riskier than the general population, leading to higher premiums for everyone. As a result, people with lower risk are discouraged from purchasing insurance, which leads to a more adverse selection and further increase in premiums.

The Problem of ________ Occurs When Those Most Likely to Get