The increasing tendency of persons with an above average likelihood of loss, or propensity to incur damages, to buy or continue insurance. For insurance companies, this situation leads to the selection of the wrong group of population (targeted insured)- i.e., those with the highest degree of risk. Consequently, this contributes to higher claims and losses and a deteriorated profitability of insurance business.
An increase in adverse selection often results from increased lapse rates, which lead to increased mortality or morbidity rates.
It is also known as antiselection (anti-selection).
