Adverse selection in insurance requires that
A)potential customers face different levels of risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are not risk averse
D)insurers can tell higher risk people from lower risk people

Question

​Adverse selection in insurance requires that
A)​potential customers face different levels of risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are not risk averse
D)​insurers can tell higher risk people from lower risk people

Quizplus · Accepted Answer

Adverse selection occurs when potential customers have different levels of risk, and those with higher risk are more likely to purchase insurance, leading to a pool of insured individuals that is riskier than the general population. This happens because insurers cannot perfectly distinguish between high-risk and low-risk individuals before providing insurance.

​Adverse Selection in Insurance Requires That

Adverse Selection in Insurance Requires That