Definition
- Adverse selection
- Adverse selection is the problem in which insurance buyers know more about whether they are high-risk or low-risk than the insurance company does.
Example
Can you think of an example of adverse selection?
Of 100 drivers, 60 will have £100 of damage in a year, 30 will have £1,000 and 10 will have £15,000. A premium covering the average is £1,860, so the low and medium risks decline it and only the £15,000 drivers buy.
Test yourself
Can you name the two problems of asymmetric information in insurance?