InsuranceFinancial Glossary
Adverse Selection
Definition
A market situation where buyers with higher risk are more likely to purchase insurance than lower-risk individuals. For example, a person who knows they have a family history of heart disease is more likely to buy health insurance than a perfectly healthy person with no family history.
Why It Matters
Adverse selection is why insurers ask detailed health questions and impose waiting periods for pre-existing diseases. It drives up premiums for everyone when high-risk individuals disproportionately buy insurance. Buying insurance when you are young and healthy actually helps keep premiums lower for the entire pool.