Adverse Selection Information Problem in Insurance Companies

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Adverse Selection Information Problem in Insurance Companies
An insurance information problem is an adverse selection problem in the real world that occurs when one party (insured) in a contract has relevant information that the other party (insurer) does not have. This issue is an information problem because there is asymmetric information, where the insured is more knowledgeable or gives incomplete or inaccurate details, making the insurance company make uninformed decisions that can cause adverse consequences.
The insured can know of significant risks involved in the insurance coverage, but the insurance company may be unaware of those actual risks. Therefore, the company would provide a higher insurance coverage since the insured risk is significantly higher than the risk the insurer knows (Maverick). Consequently, the insurer incurs adverse effects since its insurance coverage costs are higher than the premiums the insured pays and the actual risks exposure, causing an adverse selection information problem.
This research paper aims to study the mitigation aspect of the adverse selection insurance information problem or how insurance companies can protect against advers...