Which type of individuals are more likely to purchase insurance due to adverse selection?

Adverse selection occurs when individuals who are at higher risk for a certain event are more likely to purchase insurance compared to those who are at lower risk. This scenario typically leads to an imbalance in the insurance pool, where the insurer is more likely to pay out claims due to the prevalence of higher-risk individuals.

Individuals with a history of making claims fall into the category of higher risk because their previous behaviors indicate a likelihood of making future claims. Insurers use data to assess risk, and those with a claims history are considered more likely to incur additional costs. As a result, these individuals are often more motivated to purchase insurance, as they seek financial protection against future losses.

In contrast, low-risk individuals are less likely to see the value in purchasing insurance or might opt for minimal coverage, knowing they have a lower chance of experiencing a loss. Individuals seeking the cheapest policies regardless of risk parameters may not necessarily align with the concept of adverse selection since they might include a mix of low-risk and high-risk profiles attempting to save costs. Therefore, the individuals most prone to adverse selection in the insurance market are indeed those with a history of making claims, as their experience increases their desire to secure insurance coverage.