Idaho Property and Casualty Practice Exam 2026 - Free Practice Questions and Study Guide

Question: 1 / 400

In insurance, what does "adverse selection" refer to?

A situation where insurance prices are too high

A situation where lower-risk individuals seek insurance more than higher-risk individuals

A situation where higher-risk individuals seek insurance more than lower-risk individuals

Adverse selection refers to the phenomenon where higher-risk individuals are more likely to seek and obtain insurance compared to those who are considered lower-risk. This occurs because individuals who are aware of their higher risk of loss are more motivated to secure insurance coverage, creating an imbalance in the risk pool. As a result, insurance companies may face higher-than-expected claims from these insured individuals, which can lead to financial instability for the insurer.

This situation underlines the importance of underwriting and risk assessment in the insurance industry, as insurers must try to accurately evaluate the risk levels of their applicants to set appropriate premiums and maintain a balanced risk pool. Addressing adverse selection is crucial for insurers to remain solvent and to keep premiums affordable for all policyholders.

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A situation where insurance policies are cancelable at any time

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