Definition of Adverse selection:
Typically, the more knowledgeable party is the seller. Symmetric information is when both parties have equal knowledge.
Adverse selection refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality—in other words, it is a case where asymmetric information is exploited. Asymmetric information, also called information failure, happens when one party to a transaction has greater material knowledge than the other party.
Insurance firms acceptance of applicants who are uninsurable (or at a greater than normal risk), but conceal or falsify information about their actual condition or situation. Approval of their application has an adverse effect on insurance companies, because normal insurance premiums are computed on the basis of policyholders being in average good health and employed in non-hazardous environments. Also called antiselection.
How to use Adverse selection in a sentence?
- Making an adverse selection may not be the popular choice but it may be the best thing for your business at the time.
- The insurance company investigators realized new policy-holder Louis was an adverse selection shortly after he was insured, when a slew of illnesses suddenly sent him to the hospital numerous times.
- Sometimes an insurance company will accidentally take on an adverse selection and may look to try and find some reinsurance.
Meaning of Adverse selection & Adverse selection Definition