What is the term for insuring risks that have a higher likelihood of loss compared to average risks?

The chosen answer refers to adverse selection, which is a key concept in the insurance industry. Adverse selection occurs when there is an imbalance in the risk pool because individuals who are more likely to file claims are more inclined to purchase insurance.

In the context of insuring risks, this means that those with a higher likelihood of loss are drawn to insurance policies, often resulting in the insurer being exposed to a greater number of high-risk individuals than anticipated. This can lead insurers to increase premiums or adjust their underwriting criteria to maintain profitability.

Understanding adverse selection is crucial for insurers, as it highlights the importance of risk assessment and underwriting practices in order to achieve a balanced risk pool. It also underscores the significance of maintaining accurate data and statistics about risks, which helps insurers set appropriate premiums and terms for various policies. This process is critical for sustaining a healthy insurance market.