What factor may reduce the likelihood of adverse selection in insurance practices?

Implementing risk assessment measures is essential in reducing the likelihood of adverse selection in insurance practices. Adverse selection occurs when there is an imbalance of information between the insurer and the insured, where those with higher risks are more likely to seek insurance coverage while lower-risk individuals may opt out. By conducting thorough risk assessments, insurers can better understand the risk profiles of applicants.

This understanding allows insurers to price policies more accurately according to the risk they present. When risk measures are utilized effectively, it encourages a healthier mix of applicants, as it becomes less advantageous for high-risk individuals to seek out insurance at lower rates. This results in fairer premiums that can be more consistent across various categories of risk and deters those with known high risk from disproportionately flooding the market.

The other options, while they may have their own merits in some contexts, do not directly address the fundamental issue of information asymmetry that characterizes adverse selection. For instance, lowering premiums across the board could potentially attract more high-risk clients, exacerbating the problem. Similarly, effective marketing strategies and increased coverage options may improve access to insurance but do not inherently mitigate the risk of adverse selection.