What scenario would likely lead to adverse selection?

Adverse selection occurs when there is a situation where one party in a transaction has more information than the other, leading to an imbalance that can disadvantage one party, typically the insurer. In the context of insurance, it generally refers to the tendency of individuals with higher risk of loss to seek out insurance more than those with lower risk, causing an imbalance in the risk pool.

In this scenario, a high-risk individual purchasing standard coverage is most likely to lead to adverse selection. This is because high-risk individuals are more likely to require insurance coverage due to the greater likelihood of events occurring that would lead to claims, such as health issues or accidents. As more high-risk individuals enter the insurance pool, the overall risk increases, which can lead to higher costs for the insurer. Insurers may then have to adjust premiums upwards to cover this heightened risk, which can deter healthier individuals from purchasing insurance, further exacerbating the problem.

The other scenarios provided do not illustrate this imbalance effectively. A healthy person purchasing a high-deductible plan typically does not present a risk of adverse selection because they are more likely to use less insurance due to their lower risk profile. Many healthy individuals purchasing minimal insurance shows a balanced risk pool as they are not over-representing higher risk