Explore commonly used personal finance terms.
Adverse selection occurs in insurance markets when individuals with higher-than-average risks are more likely to purchase insurance, potentially leading to a higher-than-expected claims cost for insurers. This imbalance can lead to higher premiums or losses for insurance companies if they cannot adequately assess risk levels. Insurers combat adverse selection through underwriting, requiring medical exams, or adjusting premiums based on risk factors. Understanding adverse selection helps maintain sustainable pricing in insurance markets.
