Which of the following best describes the outcome of adverse selection?

Adverse selection occurs when there is an imbalance of information between buyers and sellers in the insurance market. It typically refers to a situation where individuals with a higher risk of requiring insurance are more likely to seek it out, while those at lower risk may opt out of purchasing insurance. This leads to a concentration of high-risk individuals among policyholders.

The outcome of adverse selection is characterized by an increased likelihood of costly claims for insurers. When a higher proportion of policyholders have greater chances of making claims, insurance companies may face unexpected losses. This not only threatens the financial viability of insurers but also impacts the overall pricing of insurance products in the market, as insurers will need to adjust rates to cover the higher risk. Consequently, the risk pool becomes skewed towards those who are more likely to file claims, leading to a cycle that can further exacerbate the problem of adverse selection.

Thus, the answer reflects how the dynamics of adverse selection in the insurance market can create challenges for insurers, driving up claim frequency and costs.