Question

What is “insurance death spiral,” and how might it affect the functioning of insurance markets?

Answer 1

Insurance death spiral is the problem arising out of adverse selection. In this death spiral insurance companies increases premiums due to changes in covered population.

This results when people covered by insurance starts becoming sick, cost of insurance companies increases and they pass the burden to people by charging higher premiums.

Healthy population will opt out of insurance as there are less willing to buy insurance. Unhealthy people do not qualify for the insurance. This increases the average cost to the people still covered. At last only unhealthy people will remain in the insurance market and the premium will be set based on existing group and not on population. Less number of insurance is demanded.