Oklahoma Life Producer Practice Exam

What does adverse selection in life insurance refer to?

1. Individuals with lower risk seeking more coverage

2. The higher likelihood of high-risk individuals purchasing insurance

3. Insurers reducing the number of policies issued

4. Employment-based discounts on premiums

The correct answer is: The higher likelihood of high-risk individuals purchasing insurance

Adverse selection in life insurance refers to the phenomenon where individuals who are more likely to require insurance coverage—typically those with higher health risks—are also the ones more inclined to purchase it. This creates an imbalance because if insurers do not account for this tendency, they may end up with a pool of insured individuals that is riskier than what was anticipated. When high-risk individuals disproportionately seek coverage, insurance companies face the challenge of pricing their products appropriately to cover these risks while remaining competitive. This can lead to higher premiums for all policyholders to offset the increased claims from those presenting higher risk, ultimately affecting the overall sustainability of the insurance product. Understanding adverse selection is crucial for insurers as they develop underwriting guidelines, pricing strategies, and policy conditions to effectively manage the risk associated with having a disproportionate number of high-risk policyholders.