Which of the following is a potential negative consequence of adverse selection?

Which of the following is a potential negative consequence of adverse selection?

• A. Lower overall premiums for all customers
• B. Increased costs for insurers leading to higher premiums
• C. More healthy individuals purchasing insurance
• D. Improved health outcomes for all patients

Answer: (B)

The potential negative consequence of adverse selection is indeed represented by the increase in costs for insurers, leading to higher premiums. Adverse selection occurs when there is a lack of symmetric information between buyers and sellers, typically where individuals with a higher risk of needing health care are more likely to purchase health insurance, while healthier individuals may choose to forgo insurance. As a result, insurers end up covering a larger proportion of high-risk individuals, leading to increased claims and costs. To compensate for these higher costs, insurers will raise premiums, which can further exacerbate the situation. Healthy individuals may opt out of insurance altogether due to the higher premiums, creating a cycle that leads to fewer healthy individuals in the risk pool and higher overall costs for those who remain insured. This dynamic illustrates the challenges insurance providers face in managing risk and how adverse selection can distort the market, leading to financial instability for insurers and higher costs for consumers.

The potential negative consequence of adverse selection is indeed represented by the increase in costs for insurers, leading to higher premiums. Adverse selection occurs when there is a lack of symmetric information between buyers and sellers, typically where individuals with a higher risk of needing health care are more likely to purchase health insurance, while healthier individuals may choose to forgo insurance.

As a result, insurers end up covering a larger proportion of high-risk individuals, leading to increased claims and costs. To compensate for these higher costs, insurers will raise premiums, which can further exacerbate the situation. Healthy individuals may opt out of insurance altogether due to the higher premiums, creating a cycle that leads to fewer healthy individuals in the risk pool and higher overall costs for those who remain insured.

This dynamic illustrates the challenges insurance providers face in managing risk and how adverse selection can distort the market, leading to financial instability for insurers and higher costs for consumers.