Adverse selection describes the tendency for people with higher expected risks to seek insurance more actively or buy more coverage than lower-risk people.
Insurance works by combining many risks so that premiums collected across a group can help pay the losses of members who experience covered events. If mostly high-risk people enter a pool while low-risk people remain outside, the pool can become more expensive than the insurer expected. This can push premiums upward and encourage still more low-risk customers to leave.
Insurers use underwriting, eligibility rules, pricing, waiting periods, and participation requirements to reduce this problem. Regulations may limit those tools, especially in health insurance, where lawmakers often seek broad access and community-wide risk sharing.
Adverse selection is different from moral hazard. Adverse selection concerns information or behavior before coverage is purchased, while moral hazard concerns changes in behavior after insurance exists, such as taking less care because losses are insured.