An addition…

There is still an incentive to lie no? If perfect information were available to everyone then adverse selection would indeed by gone. You will be slotted into the risk profile you were determined to belong to.

However, in the case of unsure evaluation, people still have an incentive to lie so that they could get into a group that has a lower risk than the one they should be in.

You’re right. Pooling of similar risk does seems to mitigate the adverse selection dilemma.

A very well thought out reply. Thanks!

When you pool dissimilar risks together and charge the same premium for both high and low risk participants, the average premium will be too high for the low risk participant and too high for the high risk participant. In that case, you are taking money out of the low risk participant;s pocket to subsidize the high risk participant.

That is one of the most egregious faults withe the current government mandated insurance mess that is called health insurance. Those who have little risk subsidize those who have high risk. Mandates for coverage ensure that everyone’s premium is very high. If people were allowed to select their insurance based on what they prefer, ie. the market solution, premiums in general would be a small fraction of what they are now.

There are many diseases which are not insurable. They may be devestating to those who get them, but forcing insurance policies to cover uninsurable events is only another method of redistributing wealth.

When people are devestated by a disease or high risk activity, it is the job of charity to help them, not the job of private insurance companies or individual policy holders to subsidize risky behavior or specialized risks. It is not a right to have health insurance to cover every single medical cost in our lives.

The solution is to pool only similar risks together, the orignal idea of insurance, so that everyone would share equal risk and be able to find a level of premiums and coverage that fits their needs and finances.

The idea of adverse selection assumes that it is appropriate to impose equal premiums on all participants regardless of risk. If different risks paid different premiums, the problem of adverse selection goes away. It is a confustion of true insurance with government mandated equaliziing of all people.

To the extent that insurance companies persistently loses money on their issued policies—whether it was caused by fraud or not— the result will be higher premiums paid by all.