Understanding Adverse Selection

Literal Meaning:

Adverse selection refers to the scenario where one party has more information than another in a transaction, leading to a disadvantageous outcome for the less informed party.

Contextual Meaning:

In the insurance industry, adverse selection occurs when high-risk individuals are more likely to purchase insurance, leading to higher costs for insurers.

Synonyms:

Unfavorable selection, asymmetric information

Irony:

The irony of adverse selection is that those who need insurance the most are the ones who end up paying the highest premiums due to their higher risk profile.