The problem of adverse selection in insurance results in a situation in which:
A) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies.
B) people choose too much coverage because they do not understand the complex information in the policies.
C) people choose too little coverage because they do not understand the complex information in the policies.
D) unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.
E) healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most.

Question

Quizplus · Accepted Answer

Adverse selection occurs when those who are at a higher risk of benefiting from insurance are more likely to purchase it. In other words, unhealthy people are more likely to purchase insurance than healthy people, as healthy people may not see the need to pay for coverage they may not use. This results in a disproportionate number of higher-risk individuals within the insured group, leading to higher premiums for all. As premiums increase, more healthy individuals choose to forgo insurance, exacerbating the problem.

The Problem of Adverse Selection in Insurance Results in a Situation