Adverse Selection
The tendency of poorer-than-average risks to seek or continue insurance more readily than better risks, which raises losses above what the insurer priced for. Underwriting exists to control it.
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Practice This Concept
If adverse selection becomes severe in an insurance pool, the most direct consequence is that:
The pool's actual claims exceed the claims assumed in the premium, making the rates inadequate — Adverse selection loads the pool with high-risk lives, so the claims actually experienced exceed the claims assumed when premiums were set. Rates based on the average risk become inadequate, and the insurer either raises rates, tightens underwriting, or exits the market. Managing adverse selection is why underwriting, preexisting condition rules, and enrollment requirements exist.
National insurance concept
A group health plan automatically enrolls every full-time employee and requires no evidence of insurability. Compared with voluntary individual enrollment, this structure tends to reduce adverse selection because:
Healthy employees are brought into the pool along with unhealthy ones, balancing the group's overall risk — Adverse selection concentrates when only high-risk people choose coverage. Automatic, broad enrollment forces healthy and unhealthy employees into the same pool, so the group's risk mix approximates the general population rather than being skewed toward the sick. This risk-distribution effect is why group insurance with mandatory participation is less vulnerable to anti-selection than individually purchased coverage, and why insurers and employers favor wide participation.
National insurance concept
- General InsuranceIf adverse selection becomes severe in an insurance pool, the most direct consequence i…
- General InsuranceA group health plan automatically enrolls every full-time employee and requires no evid…
- General InsuranceHow can a producer helping an applicant complete a health insurance application most di…
- General InsuranceGroup health insurance typically experiences less adverse selection than individually i…
- General InsuranceAdverse selection is generally a greater concern in individually underwritten policies …
- General InsuranceWhich statement correctly distinguishes adverse selection from moral hazard?
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