What is the main way to control adverse selection?

What is the main way to control adverse selection?

• A. Creating large homogeneous pools
• B. Individual underwriting
• C. Lowering premiums universally
• D. Expanding coverage to high-risk groups

Answer: (A)

Adverse selection happens when higher-risk individuals are more likely to buy insurance, which skews the risk pool upward and pushes premiums higher, potentially driving out lower-risk people. The most effective way to curb this is to build a large pool of insured individuals that is homogeneous in risk, so the average risk in the pool stabilizes and can be priced fairly. A big, broad pool spreads the costs across many people, reducing the influence of any one high-risk group and making premiums more predictable. When the pool is large and its risk profile is consistent, there’s less incentive for people to game the system or for high-risk individuals to cluster in the coverage, which helps maintain stability in pricing and participation.

Adverse selection happens when higher-risk individuals are more likely to buy insurance, which skews the risk pool upward and pushes premiums higher, potentially driving out lower-risk people. The most effective way to curb this is to build a large pool of insured individuals that is homogeneous in risk, so the average risk in the pool stabilizes and can be priced fairly. A big, broad pool spreads the costs across many people, reducing the influence of any one high-risk group and making premiums more predictable. When the pool is large and its risk profile is consistent, there’s less incentive for people to game the system or for high-risk individuals to cluster in the coverage, which helps maintain stability in pricing and participation.