Florida Health Insurance Terms:
"What is Adverse Selection?"

Adverse Selection: The tendency of persons with poorer-than-average health expectations (higher risk) to apply for or continue insurance coverage to a greater extent than persons with average or better-than-average health expectations (lesser risk).

The term adverse selection was originally used in insurance. It describes a situation where, as a result of private information, the insured are more likely to suffer a loss than the uninsured. For example, suppose that there are two groups among the population, smokers and non-smokers.

An insurer selling life policies can't tell which is which, so they each pay the same premiums. Non-smokers are likely to die older than average, while smokers are likely to die younger than average. So the life policy is a better buy for the smokers' beneficiaries. The insurance company anticipates or learns that the mortality rate of the combined policy holders exceeds that of the general population, and sets the premiums accordingly. The result is that non smokers tend to go uninsured though if they could buy a policy on terms that are actually fair given their characteristics, they would do so. So market failure is involved.

Whether examples of this sort apply in reality is an open question. Smokers may tend to reckless behaviour in general, so be relatively disinclined to insure. Or they may be in denial and not want to recognize their enhanced mortality. When the insured are less at risk than the uninsured this is known as advantageous selection.


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