What phenomenon describes the tendency of higher-risk individuals to seek insurance more than lower-risk individuals?

Adverse selection is the phenomenon where individuals who perceive themselves as having a higher risk of loss are more likely to seek insurance coverage compared to those who see themselves as lower risk. This can lead to an imbalance in the insurance pool because the insurance company may end up with a higher proportion of high-risk policyholders. As a result, insurance companies might face greater claims than they anticipated, which can affect their financial stability.

Understanding adverse selection is crucial in the insurance industry because it informs how insurers design policies, set premiums, and manage risks. Insurers may employ strategies such as requiring medical underwriting, instituting waiting periods, or using policy exclusions to mitigate the effects of adverse selection and ensure that the risk pool remains balanced.