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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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References in periodicals archive

Because insurance is a risk shifting mechanism, adverse selection in the purchase of insurance may be influenced by the length and type of contract (e.g., higher risk individuals choose greater coverage and longer term contracts; Dionne & Doherty, 1994); the person's ethnic background (Zuvekas & Taliferro, 2003); the risk of specified outcomes (Wang & Fischbeck, 2004); and whether the person has submitted to genetic testing (Hoel, Iversen, Nilssen, & Vislie, 2006).

Self-reported health and risk behaviors: do they influence attitudes toward pricing health insurance?

There are no simple answers to the adverse selection problem, other than insisting that everyone purchase the insurance.

What is adverse selection - and do I really care?

Consequently, we expect a lower magnitude of the spreads, of the adverse selection component of the spread, and of the PIN for those issues where additional information is revealed between the filing of the prospectus and the offer date.

Co-managers, information, and the secondary market liquidity of initial public offerings

Bush's proposal to exempt from income taxes up to $15,000 in health care expenses for everyone--even those not covered under employer plans--lacks compulsion, doesn't help low-income groups, does not address problems of adverse selection, and is too generous toward high-income groups.

The Healthcare Fix: Universal Insurance for All Americans

Researchers use several approaches to identify adverse selection. (1) Genesove (1993) tests the proposition that, in a lemons market, prices inversely relate with observable seller characteristics that correlate with seller incentives to select goods adversely.

Adverse selection, seller effort, and selection bias

In this article, we investigate the empirical tractability of the adverse selection risks associated with capital structure from 4,114 first-round Canadian venture capital investments.

Adverse selection and capital structure: evidence from venture capital

Adverse Selection, Declining Occupancy: The Negative Outlooks on classes E and F reflect the transactions increasing concentration and adverse selection.

Fitch Takes Various Actions on Lone Star Portfolio Trust 2015-LSP

My article last week stated that large losses on HECM reverse mortgages could be attributed to adverse selection. The program was attracting too many of those in desperate financial condition and too few of those with options.

More thoughts on curbing HUD losses on reverse mortgages