Adverse selection occurs when...

Adverse selection occurs when...

• A. People with higher risk buy insurance more often than average risk
• B. Insurers underwrite more strictly
• C. Lapses are more common among younger policyowners
• D. Premiums are fixed regardless of risk

Answer: (C)

Adverse selection happens when those at higher risk of a loss are more likely to purchase insurance than those at average or lower risk, so the pool of insured individuals ends up riskier than the general population. This is why the statement about higher-risk people buying insurance more often best captures the concept. The other ideas describe different ideas: stricter underwriting is a method insurers use to curb adverse selection, not the definition itself; lapses among younger policyowners describe policyholder behavior that doesn’t directly reflect the risk mix of insured lives; and premiums fixed regardless of risk reflect pricing structure rather than the selection of applicants.

Adverse selection happens when those at higher risk of a loss are more likely to purchase insurance than those at average or lower risk, so the pool of insured individuals ends up riskier than the general population. This is why the statement about higher-risk people buying insurance more often best captures the concept.

The other ideas describe different ideas: stricter underwriting is a method insurers use to curb adverse selection, not the definition itself; lapses among younger policyowners describe policyholder behavior that doesn’t directly reflect the risk mix of insured lives; and premiums fixed regardless of risk reflect pricing structure rather than the selection of applicants.