Question

What is adverse selection, and how do insurance companies protect themselves from it? If the government prohibited themselves against adverse selection, how would it affect insurance premiums?

Answer 1

What is adverse selection ?

Ans….

Adverse selection can be defined as strategic behavior by the more informed partner in a contract against the interest of the less informed partner(s). In thehealth insurance field, this manifests itself through healthy people choosing managed care and less healthy people choosing more generous plans.

How do insurance companies protect themselves from it?

Ans

Reinsurers may insure insurance companies but usually insurance companies"self-insure" or set aside reserves to cover any expected payouts under the policies. ... Sometimes insurance companies hold all the risk from underwriting policies. Sometimes insurers buy insurance from reinsurers for part of the risk

If the government prohibited themselves against adverse selection, how would it affect insurance premiums?

Ans....

Adverse selection takes place when companies insure high-risk persons forpremiums mistakenly based on those with low risk. ... If the government prohibited insurers from protecting themselves from adverse selection,premiums would have to increase dramatically, and fewer people would be willing to buy insurance.