AD Banker Comprehensive Practice Exam

The tendency for poor risks to seek and be covered for insurance more than average risks is referred to as:

1. Adverse risk

2. Adverse selection

3. Adverse hazard

4. Adverse rating

The correct answer is: Adverse selection

The correct answer is "Adverse selection." This term refers to a situation in the insurance marketplace where individuals with a higher risk of filing a claim are more likely to seek out insurance coverage, while those with lower risk tend to avoid it. This can lead to a disproportionate number of high-risk individuals in an insurance pool, which increases the overall cost of claims for the insurer. Adverse selection can occur because those who know they are at a higher risk are more motivated to obtain insurance, potentially leading to higher premiums for everyone to cover the increased risk. Insurers address this by using underwriting processes, risk assessments, and pricing strategies to manage the potential impact of adverse selection on their portfolios. Understanding this concept is crucial in the insurance field because it highlights the importance of risk management and the need for accurate risk assessments.