Question 15

The tendency of a person who has a higher than average exposure to loss to purchase insurance is known as adverse selection.

Adverse selection refers to the phenomenon where individuals with a higher risk of loss are more likely to seek insurance coverage. This behavior can lead to an imbalance in the insurance pool, as those who are less likely to experience loss may opt out of purchasing insurance.

A) adverse selection.

This option is correct because adverse selection specifically describes the situation where individuals who perceive themselves to be at a higher risk are more inclined to purchase insurance. This can lead to a concentration of high-risk individuals within an insurance pool, potentially resulting in higher costs for insurers.

B) law of large numbers.

This option is incorrect as the law of large numbers refers to the principle that as the number of trials increases, the average of the results will converge to the expected value. It does not specifically address individual behavior concerning insurance purchases and risk exposure.

C) probability distribution.

This option is incorrect because a probability distribution is a statistical function that describes the likelihood of different outcomes. While it is relevant in assessing risk, it does not explain the tendency of high-risk individuals to seek insurance.

D) risk pooling.

This option is incorrect as risk pooling involves the practice of collecting premiums from many individuals to spread the financial risk among a larger group. While risk pooling is an essential concept in insurance, it does not specifically address the behavior of individuals with higher exposure to loss in seeking insurance coverage.

Conclusion

Adverse selection is the correct term that captures the behavior of individuals who are more likely to purchase insurance due to their higher perceived risk of loss. In contrast, the other options either describe statistical principles or broader concepts in insurance without addressing the specific tendency related to risk exposure. Thus, adverse selection is the definitive answer for this question.