Adverse selection is a problem that generally arises from the occurrence of symmetric information prior to the execution of a transaction. In the insurance sector, an adverse selection refers to a situation where an insurance firm is faced with a probability of loss as a result of not factoring in a risk during the sale of an insurance cover. In the case of an adverse selection, individuals are advised to look for institutions that are designed to solve the problem.
How to Solve the Adverse Selection Problem
The adverse selection problems are commonly found on an insurance market. The individuals who would wish to attain an insurance cover are those that are most likely to experience a risk. Such customers are least required by an insurance company since these clients are entitled to high risks; these insurance consumers may be a risk to an insurer. The customers of the insurance companies are highly associated with risks compared to the randomly selected individuals. In this regards, an insurance company bases its risks estimates on the statistics concerning the insured individuals.
In the past year, the insurance-health sector’s adverse selection was solved by the use of medical underwriting. In this case, the statistics as well as the probability theory are used to predict the chances of paying the benefits to an insured individual. For the prices to be relatively low, the insurance companies require competition from other insurance companies. It has been noted that the adverse selection limits economics of the health insurance; as a result, the health insurance becomes relatively expensive for a majority of individuals to afford.
The adverse selection in the health insurance can be overcome by the government act of removing restrictions on the medical underwriting. This restriction may, in a great length, affect the proper functioning of the medical underwriting system. In order the problem to be limited, the insurers require enough information that is available to adjust the premium based on each customers risk inherent. The information needed include: the age of an individual; the family medical history,...