Final answer:
The term that best describes the process used to select and classify risks is 'risk assessment', which includes risk identification, analysis, and evaluation, and considers various challenges such as moral hazard and adverse selection.
Step-by-step explanation:
The process used to select and classify risks is best described by the term risk assessment. Risk assessment encompasses identification, analysis, and evaluation of risks and is a comprehensive approach to understanding and managing risks. When considering the controversial nature of classifying people or entities into risk groups, it is vital to account for the challenges like moral hazard and adverse selection that arise from imperfect information. For example, an insurance company's decision on how to classify a driver who experienced a major automobile accident depends on the assessment of whether the incident signifies high risk or was a result of bad luck.
Investors in the financial market also conduct risk analysis to understand and quantify the risks involved with different types of financial assets, weighing considerations such as potential returns, market volatility, liquidity, and the time horizon of their investments.