What is a main concern of adverse selection in insurance?

A primary concern of adverse selection in insurance relates to higher risk individuals skewing the risk pool. Adverse selection occurs when there is an imbalance in the information that insurers and potential policyholders have regarding risk. Individuals who know they are at higher risk are more likely to seek insurance coverage than those who are at lower risk. This results in a disproportionate number of high-risk individuals in the insurance pool, leading to higher claims than anticipated.

When this occurs, it can drive up costs for insurers, potentially resulting in higher premiums for all policyholders. Over time, if insurers do not adjust their pricing or risk stratification, it may lead to a scenario where the risks are not adequately covered, threatening the viability of the insurance product itself.