What tendency refers to insureds with a higher chance of loss purchasing more insurance?

The tendency where insured individuals or entities, who are at a higher risk of experiencing a loss, seek out more insurance coverage is referred to as adverse selection. This concept highlights a fundamental issue in insurance where those most likely to make a claim are often the ones most motivated to purchase insurance, which can lead to an imbalance in the insurance pool.

Adverse selection occurs because people with greater risk have a higher incentive to buy insurance to protect against their potential losses. This can result in insurers facing a higher than expected number of claims from a pool that is disproportionately composed of high-risk individuals. As a consequence, insurers must carefully evaluate the risks associated with providing coverage to ensure that they can remain financially viable. Understanding adverse selection is critical for insurance professionals, as it impacts risk assessment, underwriting practices, and overall pricing strategies in the insurance market.