Adverse selection is when people who are more likely to need an insurance payout (higher-risk people) are the ones most eager to buy coverage, while lower-risk people often skip it or buy less. This happens because you know your own risks better than the insurer does.
What are the Consequences of Adverse Selection?
- It pushes premiums up for everyone because the pool of insured people ends up riskier than average.
- Insurers may raise prices, reduce coverage options or even stop offering certain policies.
- It can make insurance feel unfair or too expensive for careful, low-risk people.
- If left unchecked, it can harm the whole insurance market as rising premiums drive healthy or low-risk individuals to exit the insurance pool, causing premiums to rise even further, prompting more exits and ultimately leading to the collapse or near-collapse of that line of insurance.
- It can cause insurers to withdraw from or heavily restrict coverage in high-risk industry sectors (e.g., construction).
Why Does It Occur?
- Personal Knowledge of Risks: People with known issues or risky lifestyles are more proactive about getting covered.
- Cost Considerations: Lower-risk individuals might calculate that the premiums outweigh the benefits, so they skip insurance.
- Market Dynamics: Without full disclosure or checks, the imbalance grows, affecting the overall pricing.
How Does It Actually Work?
- A young driver who regularly speeds buys comprehensive Car Insurance, while a careful driver only gets a third-party policy.
- Someone living in a flood-prone area urgently buys full Home and Contents cover, while neighbours on higher ground drop flood cover to save money.
Frequent Errors You Must Avoid
- Believing insurers can always spot high-risk people. They rely heavily on the information you give them.
- Assuming adverse selection only happens with “dodgy” applicants. It can happen unintentionally when low-risk people simply opt out.
- Hiding minor details to get cheaper premiums. This can backfire with claim denials and actually worsens adverse selection.
When Should You Talk to a Broker?
A good insurance broker can help you understand how your personal risk profile fits into the wider insurance pool, explain questions on application forms and find policies that keep things balanced and fair.
Want to Know More?
Do you want to better understand how adverse selection might affect your premiums or coverage options? Send Tank Insurance a message for a quick chat.
