Adverse Selection

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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.

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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 restrictions for naming a given individual as my contingent beneficiary?

    Life insurance is an important part of estate planning. It allows you to ensure that you can financially take care of the ... Read Full Answer >>
  5. What debt/equity ratio is typical for companies in the insurance sector?

    The debt-to-equity ratio is calculated by dividing total liabilities by total equity, and it is used to measure leverage. ... Read Full Answer >>
  6. How does the risk of investing in the insurance sector compare to the broader market?

    Due to economic, demographic and interest rate trends, there is less risk when investing in the insurance sector compared ... Read Full Answer >>
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