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.

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BREAKING DOWN '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 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 >>

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