Question

Which of the following statements about adverse selection and underwriting is incorrect?

a. Adverse selection means that individuals with greater risk are more likely to purchase insurance.
b. Adverse selection occurs because of asymmetric information—patients know more about their health status than do insurers.
c. Insurers attempt to control adverse selection by using underwriting provisions.
d. Underwriting involves the selection and classification of candidates for insurance.
e. Health insurers have unlimited power to set underwriting provisions.

Answer 1

The incorrect statement is that health insurers have unlimited power to set underwriting provisions, as their power is regulated and not unlimited. Adverse selection occurs when individuals with more information about their own risk levels purchase insurance, prompting insurers to use underwriting to protect themselves against disproportionate risk.

Step-by-step explanation:

In response to the question about which statement regarding adverse selection and underwriting is incorrect, the answer is e. Health insurers have unlimited power to set underwriting provisions. This statement is incorrect because although insurers do use underwriting to mitigate the risks associated with adverse selection, their power to set underwriting provisions is not unlimited; it is often regulated by government laws and regulations.

Adverse selection is a problem in the insurance industry that occurs due to asymmetric information, where individuals who are at greater risk are more likely to purchase insurance than those who perceive themselves to be at lower risk. Insurers counteract adverse selection by implementing underwriting provisions, which involve evaluating and classifying potential insurants to assess their risk levels and determine appropriate premiums. However, these activities are subject to regulatory constraints and ethical standards, which limit the extent to which insurers can discriminate based on risk factors.