What is a key disadvantage of adverse selection in insurance?

A key disadvantage of adverse selection in insurance is that it may result in financial strain on the insurer. Adverse selection occurs when there is an imbalance in the type of risks that insured individuals present. If only higher-risk individuals seek insurance coverage, the insurer may end up with a disproportionate number of claims relative to premiums collected, leading to potential losses. This can threaten the financial stability of the insurer, as they may have to pay out claims that exceed the premiums received from those high-risk policyholders. Consequently, managing these risks can create significant challenges for the insurer, including the need to raise premiums for all clients or limit coverage options, all of which can further complicate the insurer's financial health.

The other options, while they touch on aspects of insurance dynamics, do not directly address the financial implications that arise from adverse selection in the way that option B does.