Adverse selection can occur if:
A)high-risk persons insure themselves more heavily than low-risk persons.
B)high-risk persons claim coverage which cannot be borne by the insurers.
C)high-risk persons do not conceal information from the insurer.
D)high-risk persons make an effort to take less risk in the presence of an insurance cover.

Question

Quizplus · Accepted Answer

Adverse selection occurs when high-risk individuals are more likely to seek insurance coverage than low-risk individuals, leading to an imbalance in the risk pool and higher costs for insurers. This can happen if high-risk individuals have a higher perceived need for insurance and are willing to pay higher premiums, while low-risk individuals may choose not to purchase insurance at all. As a result, insurers may need to raise premiums to offset the higher risk, which can lead to further adverse selection as low-risk individuals drop out of the pool.

Adverse Selection Can Occur If