ADVERSE SELECTION Meaning and
Definition
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Adverse selection is an economic concept that refers to a situation where individuals or entities with a higher risk profile are more likely to participate in a transaction or purchase insurance policies compared to those with a lower risk profile. This phenomenon occurs when there is an asymmetry of information between the buyer and the seller or insurer. In adverse selection, individuals or entities have private information about their risk level, while the other party does not have access to this information.
In the context of insurance, adverse selection occurs when individuals or entities with a higher likelihood of filing a claim are more likely to purchase insurance coverage. This is because they have a better understanding of their own risk exposure. As a result, insurers may find themselves providing coverage to a pool of policyholders that is more likely to incur higher losses, leading to increased costs and potential financial strain for the insurance company.
To mitigate adverse selection, insurers often try to assess the risk profile of potential policyholders through various underwriting processes, such as analyzing previous claims history, conducting health or risk assessments, or requesting detailed information about the insured item. By obtaining more information, insurers can charge premiums that adequately reflect the level of risk. However, adverse selection can still persist if the information advantage held by individuals or entities is significant.
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S. Against the company, the lapse of policies on the lives of young and healthy men with the continuance of those on the lives of the aged and invalids.
A practical medical dictionary. By Stedman, Thomas Lathrop. Published 1920.
Common Misspellings for ADVERSE SELECTION
- zdverse selection
- sdverse selection
- wdverse selection
- qdverse selection
- asverse selection
- axverse selection
- acverse selection
- afverse selection
- arverse selection
- aeverse selection
- adcerse selection
- adberse selection
- adgerse selection
- adferse selection
- advwrse selection
- advsrse selection
- advdrse selection
- advrrse selection
- adv4rse selection
- adv3rse selection
Etymology of ADVERSE SELECTION
The term "adverse selection" originated in the field of economics and has its roots in the insurance industry. The etymology of the term can be broken down as follows:
1. "Adverse" comes from the Latin word "adversus", which means against, hostile, or unfavorable.
2. "Selection" refers to the act of choosing or selecting from a group.
Together, "adverse selection" describes a situation in which one party in a transaction has access to information that the other party does not, leading to an imbalance in knowledge. This knowledge asymmetry can result in one party making decisions that are unfavorable or adverse to the other party. In the context of economics and insurance, adverse selection commonly refers to situations where individuals with a higher risk of loss are more likely to seek insurance coverage, which can lead to higher premiums for everyone.
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