In an insurance context, what is considered adverse selection?

Adverse selection refers to the tendency of individuals with a higher risk of requiring insurance coverage to seek out and purchase that insurance more frequently than those with lower risk. This phenomenon occurs because those who know they pose a higher risk are more inclined to purchase insurance than those who do not anticipate filing claims. As a result, insurance companies may find themselves with a disproportionate number of high-risk policyholders, which can lead to increased claims costs.

When a bail bondsman or insurer is faced with a higher concentration of high-risk individuals, it can adversely affect their financial stability, leading to losses and potential insolvency. Consequently, this makes it essential for insurers to implement strategies like underwriting and risk assessment to mitigate the impact of adverse selection.

In this context, the option indicating the insuring of higher risk individuals directly aligns with the definition of adverse selection, as it encapsulates the core issue faced by insurers when they fail to equally balance their risk pool.