Insurance Term
Adverse Selection
The tendency of individuals with higher risk of loss to purchase insurance more often than those with lower risk.
Detailed Explanation
Adverse selection occurs when there is an information asymmetry between the insurer and the insured. For example, a person who knows they have a serious health condition is more likely to apply for life or health insurance than a healthy person. Insurance companies use underwriting to mitigate this risk.
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Practice QuestionEasy
Which of the following best describes the concept of Adverse Selection?
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