The problem of adverse selection in insurance results in a situation in which

A) people choose inappropriate or inadequate coverage because they do not understand the

complex information in the policies.

B) people choose too much coverage because they do not understand the complex

information in the policies.

C) people choose too little coverage because they do not understand the complex

information in the policies.

D) unhealthy people become more likely to buy insurance than healthy people, which

drives premiums up, which drives even more healthy people away from the market.

E) healthy people become more likely to buy insurance than unhealthy people, which

drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most.

D

D) unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.

Explanation:

Insurance companies must deal with the problem of adverse selection also called negative selection.

It consists on the fact that, in general, policyholders tend to prefer to hedge against the risks to which they are most exposed or have a higher risk in terms of probability.

Adverse selection is the condition that the policy holder, who knows better than the insurance company what his/her condition is, may try to take advantage of his/her better information to take policy insurances that will more likely cause a payment from the insurace company.

Adverse selection exists not only in connection with health insurance but with property insurance too.

Logically, one of the consequences is that the unhealthy people will be willing to pay a high premium because they are certain that they will use the policy, while the healthy people migth decide not to pay those high premiuns. That is described by the statement D.