Adverse selection
Insureds who know they are the riskiest buy more cover, and the pool deteriorates without the insurer being able to tell them from the rest.
Akerlof, 1970, Quarterly Journal of Economics: the used car market drains of its good cars because the seller knows what the buyer does not. In insurance, adverse selection comes from the same asymmetry, the private information an insured holds about their own risk. Every premium increase meant to cover the loss experience drives out the good risks first, so the residual loss experience climbs faster than the price, a spiral that may never converge. The decisive point: it bears on residual information, once every rateable variable is neutralized, and segmentation, however fine, cannot reach it. It explains why some markets do not exist, such as private unemployment insurance, and it recurs in warranty and indemnity cover, where the known is excluded and the unknown covered, and in legacy deals, where the cedant sells what worries it.
Job loss insurance would be too adversely selected to be profitable at any price: the people who know their job is at risk are the ones who buy it, and the insurer cannot tell them from the rest.
adverse selection, anti-selection, antiselection
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