Question

A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as?

1) Adverse selection
2) Moral hazard
3) Risk pooling
4) Underwriting

Answer 1

Adverse selection is the situation described in the question, wherein individuals with a greater probability of loss are more likely to purchase insurance.

Step-by-step explanation:

The situation described in the question is known as adverse selection.

Adverse selection occurs when individuals with a higher probability of experiencing losses are more likely to purchase insurance. This can result in a pool of insured individuals who are more likely to file claims, which can increase the costs for insurance companies.

For example, individuals with pre-existing health conditions may be more motivated to purchase health insurance, while individuals who are healthy may be less inclined to do so. This can lead to higher premiums for everyone in the insurance pool.