Final answer:
Adverse selection occurs when high-risk individuals buy more insurance without disclosing their increased risk, leading to challenges for insurers in pricing policies accurately and potential strain on the insurance system.
Step-by-step explanation:
When individuals conceal their increased risk for a disease from insurance companies, this is known as adverse selection. The term adverse selection describes a scenario in which there is an asymmetric information problem, and high-risk insurance buyers opt to buy more insurance without disclosing their increased risk to the insurer.
This is problematic for insurance companies as it makes it difficult to price insurance policies correctly and can lead to a strain on the insurance system when groups with inherently higher risks than the average person seek out more coverage.