Adverse selection

Adverse selection occurs when people with greater risk are more likely to seek coverage, making an insured pool riskier than the population it covers.

Asymmetric information: A situation in which parties to a transaction have unequal access to relevant information. Insurers know less than applicants about their individual risks.
Health insurance: Coverage that pays for or helps manage the cost of medical care. People often know more about their health needs than insurers do.
Moral hazard: A change in behavior after protection from risk alters the likelihood or cost of a loss. It arises after coverage, unlike adverse selection, which shapes who enrolls.
Insurance premium: The amount paid to maintain an insurance policy for a specified period or coverage arrangement. A riskier enrolled pool can force premiums upward.
Insurance underwriting: The process insurers use to assess applicants and set coverage terms and prices. Risk assessment and pricing determine how strongly insurers can separate applicants.
Life insurance: Insurance that pays a benefit upon the insured person’s death, subject to policy terms. Applicants may know more about their health and longevity risks than insurers.
Ex ante moral hazard: Reduced preventive effort before a loss because insurance lowers the insured person’s financial stake. It changes risk-taking before a claim, rather than enrollment by risk type.
Insurance market: A market in which insurers sell contracts that transfer specified financial risks. Selection can affect which risks insurers cover and whether coverage remains available.
Risk classification: The grouping of people or assets by estimated likelihood and cost of loss. More precise classifications can reduce cross-subsidies between risk groups.
Long-term care insurance: Insurance that helps cover assistance with daily activities or extended care needs. People anticipating future care needs may be especially likely to buy coverage.

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