Ace the Chartered Life Underwriter Challenge 2025 – Secure Your Success and Dominate the Exam!

Adverse selection occurs when there is an imbalance in the information available to buyers and sellers of insurance. Specifically, it happens when individuals who are at higher risk of experiencing a loss (such as those with pre-existing health conditions) are more likely to seek insurance than those who are at lower risk. As a result, insurance companies may end up with a pool of policyholders that is riskier than what they anticipated.

This scenario leads to a higher likelihood of claims being filed than the insurer had originally expected. Given that the insurer may base their pricing and reserves on a healthier average group, the reality of a higher-than-expected claims rate can lead to financial strain, increasing the overall claims cost for the insurer.

In contrast, lower premiums for healthy applicants would not result from adverse selection since the pricing would be skewed higher due to the increased risk of the overall pool. Increased profitability for insurers is unlikely when faced with adverse selection, as the claims experience becomes detrimental to their financial viability. Similarly, more applicants qualifying for coverage would not be a direct consequence; rather, it would typically lead to tighter underwriting standards as insurers respond to the heightened risk in their applicant pools.