What term refers to the potential for riskier individuals to be more attracted to purchasing insurance?

The term that refers to the potential for riskier individuals to be more attracted to purchasing insurance is adverse selection. Adverse selection occurs when there is an imbalance in information between the insurer and the insured, where individuals who pose a higher risk are more likely to seek insurance coverage. This phenomenon can lead to a pool of insured individuals that is disproportionately higher in risk compared to the general population.

In the context of insurance, this means that if an insurer is not able to accurately assess or differentiate between high-risk and low-risk individuals, they might end up insuring a larger number of individuals who are more likely to claim benefits. This can ultimately lead to increased losses for the insurer, which may drive up premiums for everyone in the pool, as the insurance company attempts to cover those higher risks.

Understanding adverse selection is crucial for insurance companies to develop strategies for risk assessment and premium pricing, ensuring that they maintain a balanced and profitable risk pool while still providing coverage for those who genuinely need it.