What does adverse selection refer to in the context of health insurance?

Adverse selection refers specifically to the phenomenon where individuals who are at a higher risk of needing healthcare (due to pre-existing conditions, age, or other factors) are more inclined to purchase health insurance compared to healthier individuals. This leads to an imbalance in the risk pool because the insurer ends up covering a greater proportion of high-risk individuals. As a result, the overall costs of claims can increase, which may lead to higher premiums for all policyholders. This situation can challenge the viability of insurance companies, as the increased costs may not be sustainable.

The other choices detail different aspects of the insurance mechanisms but do not accurately capture the essence of adverse selection as it directly relates to the purchasing behavior of individuals based on their health risks. For instance, assessing risk is a standard practice by insurers, and while healthy individuals may indeed seek certain benefits, this behavior is not synonymous with adverse selection. Similarly, the concept of low premiums does not directly tie into the idea of individuals gravitating towards insurance based on their risk levels. Understanding adverse selection is crucial for managing insurance risk pools effectively.