What is the result of adverse selection in insurance costs?

Adverse selection in insurance occurs when there is an imbalance in risk between those who choose to enroll in a plan and the general population. This typically happens when individuals who are more likely to require medical care—often due to pre-existing conditions or poorer health—are more inclined to purchase insurance compared to those who are healthier.

As a result, insurers may face higher costs because they are taking on a disproportionate number of high-risk individuals. This situation drives up the overall claims that the insurer must cover, which in turn leads to higher insurance costs. Insurers may subsequently raise premiums to offset these increased costs. Therefore, identifying that the result of adverse selection is higher costs for insurers underlines the significant impact that risk composition can have on the financial stability and pricing strategies of insurance providers. This heavy burden on insurers can also lead to a less equitable pricing structure in the broader insurance marketplace.