< Previous | Contents | Next >
One among the two kinds of the market failure often associated with insurance business which means doing business with the people one would have better avoided.
Adverse selection can be a problem when there is an asymmetry in information between the seller and the buyer of an insurance policy—as insurance will not be profitable when buyers have better information about their risk of claiming than does the seller of the insurance policy. In the ideal case, insurance premiums are set in accordance to the risk of a randomly selected person in the insured bracket (such as 40-year-old male smokers) of the population.
The other kind of market failure is moral hazards associated with the insurance sector.