Adverse selection
Certified Financial Planner glossary · Certified Financial Planner
Definition
The tendency of higher-than-average risks to seek insurance more actively than average risks.
Adverse selection in plain English
Open an optional cancer rider with no underwriting and the people who already suspect a problem will be first in line. Adverse selection is that tendency of higher-than-average risks to seek insurance more actively than average risks. Insurers answer with underwriting, waiting periods, and group mandates. On the exam, separate adverse selection (who buys) from moral hazard (behavior after coverage). The stem's timing usually tells you which one it is.
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