Insurance companies face the problem of ________ when people with highest probability of getting the insurance payoffs are the ones who purchase insurance.

Question

Quizplus · Accepted Answer

Adverse selection is a situation where the buyers or sellers have information that the other party does not have, which leads to a mismatch of interests. In the case of insurance, those who are most likely to make a claim are also more likely to purchase insurance. This creates adverse selection because the insurance company is left with a pool of policyholders that have a higher likelihood of making claims, which can lead to increased costs for the company.

Insurance Companies Face the Problem of ________ When People with Highest