What Is An Example Of Adverse Selection?

What Is An Example Of Adverse Selection?

1 Answer

  1. Adverse selection refers to the asymmetry of information that leads to various crisis. a very common example of it is insurance sector. Let’s say that a person is taking health insurance and knowingly hides the fact that he has some medical history of heart problem then the other party which is the insurer which has got the asymmetric information. This way the applicant manages to obtain coverage at lower premiums than the insurance company would charge if it were aware of the actual risk regarding the applicant. By concealing the history of heart disease, an applicant is leading the insurance company to make decisions on coverage or premium costs that are adverse to the insurance company’s management of financial risk.

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