What is the phenomenon called when high-risk individuals are more inclined to purchase insurance?

The phenomenon where high-risk individuals are more inclined to purchase insurance is known as adverse selection. This occurs when there is an asymmetry of information between the insurer and the insured. Essentially, individuals who perceive themselves as high-risk are more likely to seek out insurance policies because they foresee a greater chance of needing coverage. This can lead to a disproportionate number of high-risk individuals in an insurance pool, which may drive up costs for insurers and can complicate the underwriting process.

In contrast, risk aversion refers to the tendency of individuals to prefer certainty over risk, and moral hazard relates to the change in behavior of the insured after obtaining insurance coverage, often leading to riskier behavior because they do not bear the full consequences of that risk. Underwriting is the process insurers use to evaluate risk and determine premiums, but it is directly influenced by the state of adverse selection in the market. Understanding adverse selection is critical in recognizing the challenges that insurers face when setting policy terms and prices.