It refers generally to a situation in which sellers have information that buyers do not have or vice versa.
- In the common scenario, in the insurance sector those in dangerous jobs or high-risk lifestyles to purchase products like life insurance.
- In these cases, it is the buyer who has more knowledge
- To fight adverse selection, insurance companies reduce exposure to large claims by limiting coverage or raising premiums.
- For example, A life insurance company charges higher premiums for race car drivers.
- A car insurance company charges more for customers living in high crime areas.
- A health insurance company charges higher premiums for customers who smoke.