Adverse Selection

In the context of insurance, Adverse Selection refers to the tendency for individuals with a higher risk of claiming benefits to be more likely to purchase insurance, while lower-risk individuals may opt out. This imbalance can lead to increased claims and higher costs for insurers, potentially resulting in premium increases for all policyholders.

Key aspects of Adverse Selection include:

• Higher-Risk Applicants: Those more likely to claim benefits are more inclined to apply for coverage.
• Premium Impact: Can lead to higher costs for insurers and policyholders.
• Underwriting Measures: Insurers use medical exams, exclusions, and pricing adjustments to mitigate risk.

Adverse Selection and Anti-Selection are used interchangeably in insurance, both describing the same risk-related challenge where a disproportionate number of high-risk individuals seek coverage.