Florida Life and Health Insurance License Test 2025 – 400 Free Practice Questions to Pass the Exam

Adverse selection refers to the phenomenon where individuals who are at a higher risk of making a claim are more likely to seek insurance coverage compared to those at lower risk. In the context of insurance, a high-risk individual may recognize their increased likelihood of needing insurance benefits, thus they are more inclined to purchase insurance. This behavior can lead to a mismatch in the risk pool; if insurers are unaware of the risk levels of their applicants, they may end up with a disproportionate number of high-risk policyholders.

For an insurance company, this can create financial challenges, as they may have to pay out more in claims than anticipated if the selection of insured individuals is skewed toward high-risk applicants. The goal for insurers is to encourage a balanced mix of policyholders that includes both low-risk and high-risk individuals to maintain profitability and sustainability.

Understanding adverse selection is crucial for insurers as it affects pricing strategies, underwriting processes, and overall risk management within the insurance market. This concept highlights the importance of accurate assessments of risk profiles during the underwriting process.