If a state requires all drivers to buy insurance, the problem of adverse selection is eliminated.

Question

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Adverse selection occurs when one party to a transaction has more information than the other party. In the case of car insurance, drivers who are more likely to have accidents are more likely to buy insurance. This can lead to higher insurance premiums for everyone, because the insurance company has to cover the costs of the more risky drivers. However, if a state requires all drivers to buy insurance, then the insurance company knows that it is covering all drivers, regardless of their risk level. This eliminates the problem of adverse selection, because the insurance company can charge the same premium to all drivers.

If a State Requires All Drivers to Buy Insurance, the Problem