Big Health Insurance Company believes it is facing an adverse selection problem. What does this mean?

a. Buyers have more information than the company about their own risk status.
b. The company has only poor-risk customers selecting their policies.
c. The company’s health policies are unappealing to customers, causing them to go elsewhere.
d. Buyers have been changing their minds and switching from one kind of policy to another.


a. Buyers have more information than the company about their own risk status.

Adverse selection refers to the problem in which the buyers of insurance have more information about whether they are high-risk or low-risk than the insurance company does. This creates an asymmetric information problem for the insurance company because buyers who are high-risk tend to want to buy more insurance, without letting the insurance company know about their higher risk.

Economics

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