What does Adverse Selection mean?

Adverse Selection is a key term in the insurance business, and in other areas pertaining to economical businesses. The term could be defined as follows:

• It is generally the predisposition of people who work in dangerous environments to contract life insurance policies for their safety. As is the example of those working in the field of constructions or mining, where workers are put to high risks.


• Adverse Selection is also a term which suits the trade market business and it is tightly correlated to circumstances when a customer has knowledge about a product/service that the service giver himself has not, or the other way round.

Adverse Selection explained

Take as an example the types of insurance policies, but more importantly the criteria which count as decisive when an insurer builds up a certain life insurance policy. As main criteria that differentiate one life insurance from the other is whether the policy holder is in the habit of a smoking or not. This fact has a key role in the life expectancy of the policy holder.