Adverse Selection

Insurers tend to set their premiums in relation to the average experience of a population. If, in fact, members of subsets of the population have different probabilities of illness (or at any rate they believe they have different probabilities) then those with low probabilities (or low perceived ones) may not buy insurance and those with high probabilities (or perceptions) may eagerly seize their opportunity. If this happens, insurers end up with clients who are likely to prove costlier than expected. High-risk individuals tend to

A Fortiori 7

'drive out' low-risk individuals. See Asymmetry of Information, Market Failure.

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