adverse selection

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Related to Antiselection: Adverse selection

Adverse selection

Refers to a situation in which sellers have relevant information that buyers lack (or vice versa) about some aspect of product quality.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Rowe, professor of health policy and aging at the Columbia University Mailman School of Public Health, said insurers have not expressed much concern over antiselection. But that very well could change as genomics matures.
But the insurance industry is beginning to draw a line in the sand with antiselection, sometimes called "adverse selection" or "selection against the insurer."
However, the passage of the REA has created new pressures of antiselection, which occurs when an individual decision to accept or discontinue participation in a benefit plan in some way worsens the financial position of the plan.
In the past, many insurance regulators and insurers have argued that various types of health plan purchasing coalition proposals would lead to antiselection programs, but Doak told Paul he thinks the purchasing coalition idea has some merit.
The PPACA risk-adjustment program is supposed to use cash from issuers of PPACA-compliant individual and small-group plans with low-risk enrollees to compensate issuers of PPACA-compliant plans with high-risk enrollees, to protect market players against antiselection.
Once the word is out--"the word" always gets out--about our rank naivete, a dark night of rampant antiselection will descend upon us.
Nelson asked about strategies for controlling antiselection in a health coverage system in which carriers must sell health coverage even to people with serious health problems.
Yet, because few companies do additional underwriting on individuals once they are deemed as acceptable risks for the purchase of insurance, there may be antiselection occurring at the time that individuals decide how much insurance coverage to purchase.
Gap-filler product sellers might eventually have to limit sales, especially if a prolonged individual major medical shutdown leads to antiselection pressure.
State, federal and exchange rules require insurers that offer both on-exchange and off-exchange versions of plans to make both versions the same, to avoid antiselection.
health insurers 32 million new enrollees, more revenue, a closer relationship with the enrollees, and a chance to accept older, sicker applicants with less fear of antiselection.