The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government but sold mostly through the private market.) In the case of natural disasters, such as earthquakes, adverse selection concentrates risk instead of spreading it. Insurance works best when risk is shared among large numbers of policyholders.

"Adverse Selection" In Context

"Healthy young people and families drop out of the market because they can't afford the high premiums. The result is called adverse selection, leading to a "death spiral." Additional regulations seemed to make the situation worse, and prices ..."