In what situation might an insurer face adverse selection?

Adverse selection occurs when there is an imbalance in the risk profile of the insured group. This often happens when high-risk individuals are more motivated to seek insurance coverage compared to those who are at lower risk. In such cases, insurers may find themselves insuring a higher proportion of high-risk individuals than anticipated, leading to greater claims than the premiums collected.

The others options do not create the conditions that lead to adverse selection. When all policyholders are equally healthy, there is a balanced risk pool, eliminating the threat of adverse selection. Policies priced too low might attract more customers, but they could encompass varied risk levels without necessarily indicating that high-risk individuals are specifically seeking coverage. Finally, if everyone experiences similar risks, it creates a balanced pool where the insurer can more accurately predict claims, also mitigating the issue of adverse selection.