Ever feel like insurance companies are always trying to squeeze you? There's a reason! It might be partly due to something called 'adverse selection.'
Adverse selection happens when people with higher-than-average risk are more likely to buy insurance than those with lower risk. Think of it like this: someone who knows they're likely to get sick is far more eager to get health insurance than a perfectly healthy person.
This creates a problem for insurance companies. If they only sell policies to high-risk individuals, they'll pay out more in claims than they collect in premiums, leading to losses. To combat this, insurers use strategies like risk assessments, health questionnaires, and even raising premiums to cover potential payouts.
Understanding adverse selection helps you see why insurance pricing can seem complex. It's a balancing act – insurance companies need to protect themselves while still providing coverage to those who need it. So, next time you're filling out an insurance application, remember, transparency is key!
