Adverse selection occurs when there is asymmetric information between buyers and sellers, leading to high-risk individuals being more likely to purchase insurance or participate in a market. This can result in market inefficiencies and potential failure, as insurers may raise premiums to cover the higher risk, driving away lower-risk individuals.

Adverse Selection

Adverse selection

Asymmetric information occurs when one party in a transaction has more or better information than the other, often leading to market inefficiencies and suboptimal outcomes. This imbalance can result in adverse selection and moral hazard, where the less informed party is at a disadvantage, affecting decision-making and resource allocation.

asymmetric information

buyers and sellers

High-risk individuals are those who have a significantly increased likelihood of developing a particular condition or experiencing an adverse outcome due to specific factors such as genetics, lifestyle, or environmental exposures. Identifying these individuals is crucial for targeted interventions and preventive measures to mitigate potential health risks or complications.

high-risk individuals

Insurance is a financial arrangement that provides protection against potential future losses or damages by transferring risk from an individual or entity to an insurer, in exchange for a premium. It plays a crucial role in risk management, offering peace of mind and financial stability by covering various aspects of life, health, property, and business operations.

insurance

market inefficiencies

Market failure occurs when the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss. This can result from various factors such as externalities, public goods, information asymmetries, and market power, necessitating potential government intervention to correct these inefficiencies.

Market Failure

insurers

Premiums are regular payments made to an insurance company to maintain an insurance policy, reflecting the risk level and coverage provided. They are determined by factors such as the insured's profile, type of coverage, and market conditions, and can be adjusted over time based on changes in these factors.

CUSTOMIZE YOUR LEARNING

CUSTOMIZE YOUR LEARNING

Relevant Degrees