What is the tendency of less than average risks to seek insurance called?

The phenomenon where individuals or entities that perceive themselves as less than average risks tend to seek insurance is known as adverse selection. This occurs because those who believe they are at a lower risk have a greater incentive to purchase insurance, whereas those who view themselves as higher risks might opt out of purchasing insurance to avoid higher premiums.

This behavior can lead to an imbalance in the insurance pool, where the insurer ends up with a higher proportion of high-risk insureds. Insurers must manage this effect by employing risk assessments and underwriting processes to differentiate between various levels of risk among applicants. By understanding adverse selection, insurers can design better policies and pricing structures to maintain balance within their risk pools.