General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A health plan allows only higher-risk individuals to keep enrolling while healthy members drop their coverage. The most likely long-term result is:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
This is the adverse selection spiral, sometimes called a 'death spiral.' When a plan's risk pool is dominated by high-risk members, claims exceed the premium level. The insurer raises premiums, which drives out the remaining healthy members — they find cheaper options because their risk is low. Each premium increase leaves a sicker, more expensive pool, forcing further increases. The cycle worsens until the plan becomes financially unsustainable. This is why insurers underwrite at application and require group participation.
Why the other options are wrong
- B) Premiums rise, not fall, because the remaining pool has above-average claims.
- C) A small, self-selected pool of high risks is LESS predictable, not more; the law of large numbers needs a large, representative pool.
- D) Rising premiums make the plan less attractive to healthy applicants, who increasingly choose to leave.
Memory hook
Healthy leaves, premiums climb, and the exit door only swings one way — the adverse-selection spiral.