CPB Certified Professional Biller Certification Practice Exam

What does adverse selection refer to in insurance?

1. Excluding healthier individuals from coverage

2. Covering members who are healthier than the general population

3. Offering equal rates to all members

4. Covering members who are sicker than the general population

The correct answer is: Covering members who are sicker than the general population

Adverse selection in insurance refers to a situation where individuals who are at a higher risk of making a claim are more likely to seek insurance coverage than those who are at a lower risk. This results in an insurance pool that is skewed toward higher-risk individuals, leading to increased costs for the insurer. In this context, covering members who are sicker than the general population exemplifies adverse selection. These individuals tend to utilize more medical services, resulting in higher claims against the insurance policy. This can create a feedback loop where higher claims lead to increased premiums, potentially driving healthier individuals away from the insurance pool, further exacerbating the issue. The concept is pivotal in understanding how insurance markets operate because it underscores the importance of risk assessment and management. Insurers must develop strategies to mitigate adverse selection, such as underwriting practices, to balance the risk and ensure the sustainability of the insurance plan.