Adverse Selection

When parties select transactions that they think will benefit them, based at least partially on their own private information, that's called adverse selection. People who know they are going to need dental work are more likely to seek out dental insurance. This unfortunately drives up the price for everyone. Two ways to mitigate adverse selection in the insurance market are to mandate participation, as many localities do for car insurance, and to distinguish subpopulations based on their risk profiles, as life insurers do for smokers.