Adverse Selection

Adverse selection is a term used in economics and insurance in reference to a market process in which buyers or sellers of a product or service are able to use their private knowledge of the risk factors involved in the transaction to maximize their outcomes, usually at the expense of the other parties to the transaction. The concept of adverse selection was first used predominantly in the insurance industry to describe the greater likelihood that the people who elect to purchase insurance policies are more likely to file claims that will, over the life of the policy, exceed the total dollar value of the premiums that they pay.

The individuals who elect to purchase insurance know that they have higher risk factors than the population norm ...