Which concept best describes the tendency for individuals with higher risk to seek insurance, compared with lower-risk individuals?

• A. Adverse selection
• B. Moral Hazard
• C. Exposure
• D. Speculative Risk

Answer: (A)

Adverse selection describes the tendency for individuals with higher risk to seek insurance more than those with lower risk. Because high-risk people know more about their own health and likelihood of a claim than the insurer, they’re more motivated to buy coverage. This skews the insured pool toward higher-risk individuals, raising the average expected loss for the insurer. To keep costs manageable, insurers may raise premiums or tighten underwriting, which can further limit coverage or push healthier people out of the market.

Moral hazard is a different idea: once people are insured, they may engage in riskier behavior because losses are covered. Exposure refers to the amount of risk actually facing the insurer (how much of something is at risk, like the number of people or the amount of time exposed). Speculative risk is risk that involves the possibility of both gain and loss and isn’t specifically about purchasing insurance.