General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
In a voluntary health insurance pool, several healthy members allow their coverage to lapse while the sicker members remain enrolled. The likely result is:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
When healthier members leave a voluntary pool and higher-risk members remain, the average risk of the pool rises - this is adverse selection. Higher expected claims force premium increases, which can drive even more healthy members away, worsening the cycle. This is why group plans with mandatory participation and guaranteed-issue markets with enrollment rules are structured to dilute adverse selection.
Why the other options are wrong
- B) The remaining pool is sicker, so average risk rises and premiums rise, not fall.
- C) Lapses are not random here; healthy members systematically exit, which is exactly adverse selection.
- D) Administrative costs are unaffected by the risk mix; the effect is on claims and pricing.
Memory hook
Healthy leave, sick stay -> pool sickens -> premiums climb. The adverse selection spiral.