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Usually people or companies with high risks are more likely to purchase insurance. This is called...

Usually people or companies with high risks are more likely to purchase insurance. This is called adverse selection. True False

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Answer #1

True.

By definition, Adverse selection occurs when buyers have better information than sellers, and this can distort the usual market process. It can lead to missing markets as firms do not find it profitable to sell a good.

As an example for life insurance companies, their insurance products are bought by people who see a high risk attached to their life. If now, the insurance companies charge them an average premium, they are going to make a loss (since event has a high probability of occurence and they will have to pay out the claims).

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