What does adverse selection refer to in group insurance?

Adverse selection in group insurance refers specifically to the phenomenon where individuals with a higher risk of needing healthcare services are more likely to enroll in an insurance plan. This situation arises because those who expect to incur greater medical expenses are motivated to obtain insurance to mitigate their potential out-of-pocket costs. As a result, the insurance pool may become skewed towards higher-risk individuals, leading to potentially higher claims and costs for the insurer.

This concept is crucial in understanding how group insurance operates because it impacts the pricing and availability of insurance plans. When a significant number of high-risk individuals enroll without a balancing influx of low-risk individuals, it can drive up premiums and create unsustainable financial pressures on the insurance provider.

In contrast, the other options reflect situations that do not align with the definition of adverse selection. For instance, high enrollment rates of healthy individuals would typically mitigate adverse selection, leading to a healthier premium pool. Similarly, a situation where insurance costs are lowered would not occur in the presence of adverse selection, as high-risk groups increase overall costs. Lastly, an equal distribution of health risks among enrollees represents an ideal scenario for insurance companies, which aligns with the opposite of adverse selection.