General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
If adverse selection becomes severe in an insurance pool, the most direct consequence is that:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Adverse selection loads the pool with high-risk lives, so the claims actually experienced exceed the claims assumed when premiums were set. Rates based on the average risk become inadequate, and the insurer either raises rates, tightens underwriting, or exits the market. Managing adverse selection is why underwriting, preexisting condition rules, and enrollment requirements exist.
Why the other options are wrong
- B) A worsening risk mix does not lower premiums; it pushes claims up and premiums must follow to stay adequate.
- C) Underwriting becomes more important, not less, precisely because the risk mix has deteriorated.
- D) The law of large numbers predicts group outcomes; it does not guarantee any individual's health.
Memory hook
Adverse selection = the sick arrive first. The average rate stops being average when the pool skews sick.