adverse selection

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Adverse selection

Refers to a situation in which sellers have relevant information that buyers lack (or vice versa) about some aspect of product quality.

Adverse Selection

A sociological phenomenon in which those persons with the most dangerous lifestyles or careers are the most likely to buy life insurance policies. Adverse selection may also occur if those persons conceal or falsify relevant information when they apply for the insurance policy. This has the potential of economic hardship for life insurance companies because those most likely to receive a death benefit are the ones buying policies. This reduces profit potential. Life insurance companies attempt to counteract adverse selection by limiting coverage and/or raising premiums. Adverse selection is also called antiselection.

adverse selection

the tendency for people to enter into CONTRACTS in which they can use their private information to their own advantage and to the disadvantage of the less informed party to the contract. For example, an insurance company may charge health insurance premiums based upon the average risk of people falling ill, but people with poorer than average health will be keener to take out health insurance while people with better than average health will tend not to take out such health insurance, so that the insurance company loses money because the high risk part of the population is over-represented among its clients. Adverse selection results directly from ASYMMETRY OF INFORMATION available to the parties to a contract or TRANSACTION. Where there is hidden information that is private and unobservable to other parties to a transaction, the presence of hidden information or even the suspicion of hidden information may be sufficient to hinder parties from entering into transactions.
References in periodicals archive ?
What the anti-selection problem means is that insurers probably won't write guaranteed-issue coverage on groups with fewer than 50 members if one of the employees is 75 years old, Corcoran said.
John Alden Life also recently introduced a new and flexible product portfolio which will enable the company to better compete under the current "localized" health-care environment and not expose itself to the anti-selection that it has been exposed to in recent years.
Growing competition has led to a much less productive sales force and, interestingly, greater anti-selection from the customers.
Speaking at a rally organised by anti-selection campaigners in Ripon, North Yorkshire, Lord Hattersley condemned the selective system created by the country's 164 remaining grammar schools as "inefficient, unjust and socially divisive".
In hindsight, experience studies showed, for example, that the marketing approach used for a term product resulted in anti-selection, causing significant adverse claims experience," said Ray Eanes, Chief Financial Officer.
For insurers that have forsaken testing altogether in the name of reduced costs and increased sales, it could mean greater market share initially as anti-selection drives self-diagnosers to find insurers that won't detect their hidden ailments.
The process was started by anti-selection campaigners, who claimed grammars were out-dated and distorted the city's education system.
The lack of anti-selection (the employer not only pays the premium and owns the policy, but is also the beneficiary of the policy).
Anti-selection campaigners need 20 per cent of eligible parents to sign a petition before a ballot against the grammars can even be triggered.
These miscalculated large-line needs are still a primary source for anti-selection.
The usual anti-selection diatribes are rehashed: other schools are damaged because grammars cherry-pick the best pupils, you cannot decide a child's future at the age of 11, the only fair system is comprehensive education which offers equal opportunities to all.
Underwriters are trained to sniff out cases that might present some form of anti-selection, selective lapses, or increased potential for violent death.