The tendency of individuals with higher loss exposure to purchase insurance more often than those at average risk is called?

• A. Moral hazard
• B. Underwriting
• C. Adverse selection
• D. Risk pooling

Answer: (C)

Adverse selection happens when people with higher chances of a loss are more likely to buy insurance than those at average risk. They have more to gain from coverage, so enrollment skews the insured pool toward higher-risk individuals. This can lead to higher expected losses for insurers and, if not addressed, higher premiums or tighter underwriting. The concept relies on information asymmetry—buyers often know their own risk better than the insurer. Moral hazard would describe changes in behavior after obtaining insurance, not the decision to purchase. Underwriting is the process insurers use to evaluate risk and set premiums, and risk pooling is the broad idea of spreading loss across a group. The tendency described is adverse selection.