Long Term Care Certification Practice Test

What is often a consequence of adverse selection for insurers?

1. Lower overall claims costs

2. Higher ratios of high-risk policyholders

3. Increased customer satisfaction

4. Improved profitability for all insurers

The correct answer is: Higher ratios of high-risk policyholders

In the context of insurance, adverse selection occurs when there is an imbalance in the risk profile of policyholders. This typically happens when individuals who perceive themselves to be at higher risk are more likely to seek insurance coverage than those who feel they are at lower risk. As a result, the insurer ends up with a higher proportion of high-risk policyholders. When an insurer faces adverse selection, the increased presence of these high-risk individuals can lead to a higher incidence of claims. Because these insured individuals are more likely to require payment of benefits, it raises the overall costs for the insurer. Consequently, the correct answer highlights that one of the key outcomes of adverse selection is indeed a higher ratio of high-risk policyholders, which creates challenges for the insurer's profitability and stability in the marketplace. This choice correctly identifies the fundamental consequence of adverse selection, as the pool of insured individuals becomes skewed towards those who are more likely to file claims, resulting in a financial strain on the insurer. Other options do not reflect the realities of adverse selection, as it typically leads to increased risk and costs, rather than lower claims costs, improved profitability for all insurers, or greater customer satisfaction.