What is the practice of insuring risks that are more prone to losses than average risks called?

The practice of insuring risks that are more prone to losses than average risks is known as adverse selection. Adverse selection occurs when individuals or entities with a higher likelihood of making a claim are the ones most likely to seek insurance. This can lead to a skewed risk pool where the insurer may face a disproportionate number of claims compared to what they had anticipated based on the average risk.

In a typical insurance setup, insurers aim to gather a diverse group of policyholders, balancing out lower-risk individuals with those who are higher risk. However, if more high-risk individuals opt for insurance, the insurer's financial health can be jeopardized, as they might be paying out more in claims than they receive in premiums. This phenomenon is a fundamental concern for underwriters and is carefully managed through guidelines, pricing, and risk assessment processes in personal lines insurance.

The other options do not accurately describe this specific practice. Risk assumption refers to taking on some degree of risk, typically involves self-insuring or retaining risk rather than transferring it to an insurer. Loss minimization refers to strategies that aim to reduce the severity or impact of an event that triggers a claim, while risk pooling involves grouping policies to spread out individual risks and provide a more predictable cost structure for insurance