Adverse Selection

AAA

DEFINITION of 'Adverse Selection'

1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance.

2. A situation where sellers have information that buyers don't (or vice versa) about some aspect of product quality.

INVESTOPEDIA EXPLAINS 'Adverse Selection'

1. In order to fight adverse selection, insurance companies try to reduce exposure to large claims by limiting coverage or raising premiums.

VIDEO

Loading the player...
RELATED TERMS
  1. Life Insurance

    A protection against the loss of income that would result if ...
  2. Market

    1. A medium that allows buyers and sellers of a specific good ...
  3. Bear Market

    A market condition in which the prices of securities are falling, ...
  4. Automatic Premium Loan

    An insurance policy provision that allows the insurer to deduct ...
  5. Cestui Que Vie

    The individual who is the beneficiary of a trust or insurance ...
  6. Classified Insurance

    Insurance coverage provided to a policyholder that is considered ...
RELATED FAQS
  1. How do financial market exhibit asymmetric information?

    Financial markets exhibit asymmetric information in that in a financial transaction, one of the two parties involved will ... Read Full Answer >>
  2. What is the difference between moral hazard and adverse selection?

    Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller, whereas ... Read Full Answer >>
  3. Which markets are most prone to market failure from adverse selection?

    Adverse selection causes market failure -- a sub-optimal level of beneficial trades -- whenever material information cannot ... Read Full Answer >>
  4. What are the main factors that impact share prices in the insurance sector?

    The main factors that impact share prices in the insurance sector are interest rates, earnings and actuarial risk. In the ... Read Full Answer >>
  5. Why do insurance policies have deductibles?

    Insurance policies have deductibles for behavioral and financial reasons. Moral Hazards Deductibles mitigate the behavioral ... Read Full Answer >>
  6. Which emerging markets are seeing the strongest growth in the insurance sector?

    The emerging market economies seeing the strongest growth for the insurance sector are primarily the main emerging market ... Read Full Answer >>
Related Articles
  1. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  2. Insurance

    15 Insurance Policies You Don't Need

    Learn how to save money by saying "no" to unnecessary coverage.
  3. Retirement

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  4. Economics

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  5. Options & Futures

    Moral Hazards: A Bump In The Contract Road

    Learn how this phenomenon can cause a party in an agreement to behave differently than expected.
  6. Retirement

    Alternative Investments In Your IRA

    If you stray off the beaten path when investing your IRA assets, you'll find new potential pitfalls and rewards.
  7. Insurance

    How Does Cash-Value Life Insurance Work?

    Cash-value life insurance pays a beneficiary upon the death of the policyholder, and accumulates a cash value during the policyholder’s lifetime.
  8. Investing Basics

    Top 3 Ways to Manage Lump-Sum Windfalls

    Have you just had a load of money drop into your lap? If so, several enviable options are available to you. Which one is the best choice?
  9. Insurance

    Indexed Universal Life Insurance: The Pros & Cons

    What you need to know, to see if these vehicles fit into your financial plan.
  10. Insurance

    Understanding Cash Surrender Value

    The amount of money an insurance company pays the owner of an insurance policy if the policy is voluntarily surrendered prior to the event that is insured

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!