Glossary

Adverse selection

The tendency of people with higher-than-average risk to seek more coverage, which drives up costs if insurers cannot spot and price that risk.

Also called: anti-selection, antiselection

Adverse selection, also called anti-selection, happens when the people most likely to file claims are also the most eager to buy insurance, and they know more about their own risk than the insurer does. Someone who has just received a worrying diagnosis has a strong reason to apply for a large policy; someone in excellent health may decide coverage is not worth the price.

Insurers counter adverse selection mainly through underwriting: health questions, medical records, prescription histories and exams sort applicants into rate classes so each pays a price that matches their risk. Where underwriting is light or absent, the product is designed around the problem. guaranteed issue policies, for example, typically pay only a return of premiums plus interest if the insured dies of natural causes in the first two or three years, and they charge more per dollar of coverage.

Adverse selection also explains rules consumers run into: the the two-year contestability period that lets an insurer review misstatements, health questions for late enrollees in employer plans, and caps on coverage available without full evidence of insurability. Hypothetical example: if a group plan let anyone add $500,000 of coverage at any time with no questions, people would sign up after a diagnosis, and premiums would rise for everyone.

Last reviewed October 4, 2026

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Related terms

Underwriting The process an insurer uses to evaluate an applicant's risk, from health and lifestyle to finances, and decide whether and at what price to offer coverage. Guaranteed issue Coverage an insurer must approve regardless of health, with no exam or health questions, usually for small amounts and with a waiting period. Rate class The underwriting category, such as preferred plus, standard or substandard, that sets the price an insurer charges for a given age and coverage. Graded benefit A death benefit limited during a policy's first two or three years, often to premiums paid plus interest, unless the death is accidental. Mortality rate The share of people of a given age expected to die within a year, often shown as deaths per 1,000; it is the foundation of life insurance pricing.

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