May 30, 2023 • 1 min
Adverse selection refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality. In other words, it is a case where asymmetric information is exploited.
Asymmetric information, also called information failure, happens when one party to a transaction has greater material knowledge than the other party.
Typically, the more knowledgeable party is the seller. Symmetric information is when both parties have equal knowledge.
In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to purchase products like life insurance. In these cases, it is the buyer who actually has more knowledge.
To fight adverse selection, insurance companies reduce exposure to large claims by limiting coverage or raising premiums.
Become a supporter of this podcast: https://www.spreaker.com/podcast/investment-terms--4432332/support.
Asymmetric information, also called information failure, happens when one party to a transaction has greater material knowledge than the other party.
Typically, the more knowledgeable party is the seller. Symmetric information is when both parties have equal knowledge.
In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to purchase products like life insurance. In these cases, it is the buyer who actually has more knowledge.
To fight adverse selection, insurance companies reduce exposure to large claims by limiting coverage or raising premiums.
Become a supporter of this podcast: https://www.spreaker.com/podcast/investment-terms--4432332/support.
Mark as Played
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations.
Death, Sex & Money
Anna Sale explores the big questions and hard choices that are often left out of polite conversation.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.