Adverse Selection

The tendency of those who most expect to collect to buy the most coverage.

Overview

If only the sick insured, premiums would spiral until the healthy exit and the pool collapses, the classic death spiral of pre reform individual markets. Insurers fight back with underwriting, risk classification, waiting periods, and preexisting condition exclusions, while some policy regimes force the opposite: guaranteed issue combined with subsidies and enrollment pressure to keep the healthy inside the pool. The information asymmetry runs one way, since applicants know their health, driving record, and property defects better than carriers do. Life insurance requires insurable interest to stop bets on strangers. Reinsurance markets see the same dynamic when cedents keep the good risks and reinsure the rest, priced through data and treaty terms.