What phenomenon occurs when lower or poorer risks are more prone to losses than average risks?

Adverse selection is a concept that arises in insurance and risk management, referring to the tendency of individuals or entities that pose a higher risk of loss to seek out insurance more than those who present lower risk profiles. This phenomenon leads to a disproportionate number of higher-risk individuals in an insurance pool, which can cause higher than expected claims costs for insurers.

In the context of title insurance, adverse selection can manifest when properties with potential title issues or a history of claims are more likely to seek coverage, while properties that are stable and less prone to legal disputes may opt not to purchase insurance. This can create challenges for insurers, as they must balance the risk associated with covering properties with a higher likelihood of claims.

The other options, while they may pertain to various concepts in insurance and risk management, do not encapsulate this specific tendency towards higher-risk individuals more actively seeking coverage than lower-risk individuals. For example, reduction generally refers to mitigating risks rather than the selection aspect, declination involves an insurer's refusal to provide coverage, and transferring typically refers to shifting the risk to another party, such as through reinsurance.