Question 70

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 out insurance coverage. This situation arises because these individuals are more aware of their risk levels and thus more likely to insure themselves against potential losses.

A) adverse selection.

This option is correct because it directly describes the behavior of individuals who, due to a higher exposure to risk, are more inclined to purchase insurance. Adverse selection occurs when those at greater risk are disproportionately represented among the insured population, leading to potential financial challenges for insurers.

B) law of large numbers.

This option is incorrect as it refers to a statistical principle that states that as a sample size increases, its mean will get closer to the expected value. While this concept is relevant to insurance, it does not address the specific behavior of individuals with higher exposure to loss purchasing insurance.

C) probability distribution.

This option is incorrect because probability distribution is a mathematical function that describes the likelihood of different outcomes. It does not specifically pertain to the behavior of individuals purchasing insurance based on their risk exposure.

D) risk pooling.

This option is incorrect as it describes the practice of grouping multiple risks together to minimize the overall risk for insurers. While risk pooling is a fundamental concept in insurance, it does not specifically explain why individuals with higher risk are more likely to seek insurance.

Conclusion

Adverse selection is the key concept illustrated in this question, highlighting the behavior of risk-prone individuals in the insurance market. The other options, while related to insurance principles, do not accurately capture the specific tendency of high-risk individuals to seek insurance coverage. Thus, adverse selection stands out as the correct answer.