What is meant by adverse selection in health insurance?

Adverse selection refers to the phenomenon where individuals who are at higher risk for making claims are more likely to seek out and purchase insurance coverage. This results in an imbalance in the risk pool because if a significant portion of the insured population consists of high-risk individuals, the insurance company may face higher claims than it had anticipated based on the premiums collected.

This situation can lead to increased costs for the insurer, which may ultimately result in higher premiums for all policyholders, as the insurer needs to compensate for the increased risk and claims. Addressing adverse selection is crucial for insurance companies, as it impacts their financial stability and ability to offer affordable coverage.

In contrast, the other options do not accurately describe adverse selection. For instance, the idea of low-risk individuals purchasing insurance would not contribute to adverse selection; instead, it would help create a balanced risk pool. The illegal selling of insurance policies is unrelated to the concept, and the requirement for all individuals to buy insurance reflects regulatory measures aimed at preventing adverse selection rather than describing the phenomenon itself.