What is Adverse Selection?
Adverse Selection A situation in which higher-risk individuals are more likely to purchase insurance, leading to an imbalance in the risk pool and potential losses for the insurer.
Source: CFA Institute, IFRS Foundation, FASB (GAAP), Basel III Framework
How is “Adverse Selection” Used in Practice?
Adverse selection can lead to higher claim costs if the insurance pool disproportionately attracts high-risk individuals.
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Who Needs to Know This Term?
- Financial Analysts
- Bankers
- Traders
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What is Adverse Selection?
A situation in which higher-risk individuals are more likely to purchase insurance, leading to an imbalance in the risk pool and potential losses for the insurer.
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