Final answer:
Adverse selection is a term used in the insurance industry when high-risk individuals seek insurance more often, leading to a strain on the insurance system due to asymmetric information between buyers and insurers.
Step-by-step explanation:
When individuals with a higher probability of loss seek out insurance more frequently than the general population, this scenario is recognized in the insurance industry as adverse selection. Adverse selection occurs due to the asymmetric information problem where insurance buyers possess more knowledge about their risk levels than the insurance company. High-risk individuals are inclined to purchase more coverage because they anticipate a greater likelihood of filing claims, but they may not disclose their risk status fully to insurers.
For instance, someone with a known family history of medical issues may seek health insurance without revealing the extent of their potential health risks. This can lead to a disproportionally high number of high-risk individuals in the insurer's client base, causing financial strain for the company. If the insurer raises premiums to mitigate these losses, it may unintentionally drive away low-risk customers, further exacerbating the problem.