what is adverse selection in insurance

Adverse selection in insurance refers to the situation where one party, typically the buyer, has more information than the other party, leading to an imbalance of information. This can result in high-risk individuals being more inclined to purchase insurance, causing a disproportionate number of high-risk policyholders. As a consequence, insurance companies may face increased costs and losses. To mitigate adverse selection, insurance companies can take measures such as accurately identifying risk factors, limiting coverage, or raising premiums for high-risk individuals