What is the term for the selection process where less favorable insurance risks tend to seek insurance more frequently?

The selection process where less favorable insurance risks tend to seek insurance more frequently is known as adverse selection. This occurs when individuals who are at a higher risk of making a claim are more likely to purchase insurance than those who are at lower risk. As a result, insurance companies may find themselves insuring a disproportionately high number of high-risk individuals, which can lead to increased costs and potential financial instability.

Adverse selection is a critical concept in insurance underwriting and pricing because it highlights the importance of risk assessment. Insurance companies typically use various tools such as medical examinations, questionnaires, and historical data to mitigate this risk. By accurately assessing the level of risk presented by potential policyholders, insurers can create premium structures that reflect the likelihood of claims, thereby maintaining a balanced risk pool.

Understanding adverse selection helps individuals in the insurance industry recognize the need for effective risk management strategies to ensure that insurance remains viable for both insurers and insureds.