Maryland Life and Health Insurance License Practice Exam

What may be a result of adverse selection in health insurance?

1. Higher premiums for everyone

2. Lower overall claims

3. Improved risk assessments

4. Increased customer trust

The correct answer is: Higher premiums for everyone

Adverse selection occurs when there is an imbalance in risk among the insured population, often because those with higher health risks are more likely to purchase insurance or seek more coverage. This can result in a situation where only those with a greater likelihood of needing medical care enroll in a health insurance plan while healthier individuals opt out or choose minimal coverage. As a consequence of this increased enrollment of higher-risk individuals, insurance companies may find that they are paying out more in claims than anticipated. To manage this financial strain, insurers often respond by raising premiums across the board. This adjustment is necessary to maintain the insurer's financial viability and ensure that they can cover the higher claims costs associated with a less healthy risk pool. Consequently, the result of adverse selection is typically higher premiums for everyone in the insurance plan. It underscores the importance of balancing risk in the insurance market to keep premiums stable and affordable for all policyholders.