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Definition of 'Adverse Selection'

Definition: Adverse selection is a phenomenon wherein the insurer is confronted with the probability of loss due to risk not factored in at the time of sale. This occurs in the event of an asymmetrical flow of information between the insurer and the insured.

Description: Adverse selection occurs when the insured deliberately hides certain pertinent information from the insurer. The information may be of critical nature as these help in ascertaining the risk profile of the insured and accordingly help in determining the correct premiums. However, non disclosure of the information which impacts the life of the insured can lead to faulty determination of premiums and may lead to loss of the insurance company as the insurer will find it difficult to do a prudent asset liability management owing to payment of more claims compared to the receipt of premiums.

Also See: Life Assured, Non-Standard Life, Premium, Premium Paying Term, Subrogation, Paid-Up Policy, Mitigation


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