Question

Topic: Adverse Selection

Give an example of a situation that led (or could have) to adverse selection at your place of work. (Transportation)

Answer 1

It shall be noted that Adverse selection is when sellers have information that buyers do not have, or vice versa, about some aspect of product quality.

For example - A car owner living in the high crime areas when charged a premium at an average rate leads to a situation of adverse selection. It is highly likely that the car owner would be more willing to take car insurance and make more number of claims in the coming times, for theft and other damages to the car that the criminal activities in the area would do to the car, than the car owner living in a civilized area.