The additional amount (charge/ surcharge) for an insurance policy or similar contract (credit derivative contract) that arises from situations of adverse selection in the risk pool. The insurance premium may be increased either if an insurer is certain about adverse selection risks (the case of anticipated losses) or if the quality of information gathered on a risk factor is low (the case of unanticipated losses).
For insurance companies, adverse selection 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.
