The sorting by which insureds who know themselves riskiest buy more, degrading a pool the insurer cannot tell apart.
Adverse selection arises from the private information an insured holds about their own risk and the insurer cannot observe. Every premium rise 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 is that it bears on residual information, once every rateable variable is neutralized, so segmentation, however fine, cannot reach it. It explains the non-existence of certain markets, such as private unemployment insurance, and recurs in warranty and indemnity cover, where the known is excluded and the unknown covered, as in legacy, where the cedant sells what worries it.
Job loss insurance would be too adversely selected to be profitable at any price, for those who know themselves threatened buy it, and the insurer cannot tell them from the rest.
sélection adverse, anti-sélection, antisélection, adverse selection, Anti-sélection