Adverse Selection and Methods to Correct Potential Problems

Adverse Selection
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Adverse Selection
Adverse selection happens when sellers have information that buyers do not have. This situation leads the one lacking information to make a biased decision. An adverse situation in the insurance industry happens when the insurance company covers an individual whose risk is higher than the organization initially predicted. The company suffers from adverse selection by offering insurance at a cost that does not consider the risk exposure.
A smoker getting insurance coverage at the same cost as a non-smoker is an example of adverse selection. Insurance companies view smokers as people who use nicotine in any form. Additionally, they insist on medical tests before covering one. Traces of Nicotine are often found in blood, urine, saliva, and hair. The length of time nicotine stays in one's blood depends on their smoking habits and general health. The insurance compan...