HEALTH ASSIGNMENT 2

NAME: STEPHANIE ACHEAMPONG

WHAT IS ADVERSE SELECTION? HOW DOES ITS EXISTENCE AFFECT THE

MARKET FOR HEALTH INSURANCE? WHAT ARE SOME OF HOW INSURANCE
COMPANIES TRY TO PROTECT THEMSELVES FROM ADVERSE SELECTION?

WHAT IS ADVERSE SELECTION

Adverse selection happens when individuals can assess the risk they face in a circumstance better
than an insurance provider can. Thus, adverse selection occurs in insurance markets when the
risk pool of covered persons is biased towards those with higher risk, making it less attractive to
insurers. This risk profile imbalance can considerably impact the insurance industry, particularly
in the context of health insurance. When people may acquire insurance for less than the
actuarially reasonable premium plus the loading factor, this scenario arises. It is brought on by
insurance firms' asymmetric information. Adverse selection usually occurs when individuals who
think they have a low risk of being ill will refuse to subscribe to insurance as compared to those
who have a high risk of being sick or are frequently sick, who will purchase the insurance then
hide their illness from the insurance companies

HOW DOES ITS EXISTENCE AFFECT THE MARKET FOR HEALTH INSURANCE?

1. The overall rate or premiums may increase: A greater percentage of people who are more
likely to need medical attention join the insurance plan as a result of adverse selection,
creating an unbalanced risk pool. As a result, rates for all policyholders may increase,
raising the overall cost of providing coverage as more claims must be paid by insurers. So
the rates may be charged higher irrespective of those who frequently become ill and those
who are less likely to become ill and this is as a result of adverse selection.
2. Market instability: Adverse selection leads to market instability in the health insurance
sector by interfering with insurers' ability to estimate costs and expenses. Because of this
uncertainty, insurance businesses struggle to manage their resources and prepare for the
future efficiently. As a result of the increased risks and uncertainties, potential new
 insurers may be unwilling to enter the market. Furthermore, already existing insurers may
choose to exit specific locations or markets where adverse selection is particularly
prevalent, resulting in less competition and fewer options for consumers seeking
insurance coverage. Finally, this cycle of insecurity can harm the availability and cost of
health insurance alternatives for people and families.
3. Limited coverage: Adverse selection might lead to limited coverage of health needs
among the population or patients. This is because the insurance companies may perceive
individuals who normally purchase premiums are more likely to have certain types of
illness which are costly to cater for. Hence, they opt for those sicknesses or illnesses,
making individuals willing to subscribe to an insurance premium less willing to do so
because it covers only a limited number of illnesses.
4. Finally, adverse selection leads to high administrative costs: Adverse selection can raise
administrative expenses for insurers since they may need to devote more resources to risk
assessment, underwriting, and claims processing to handle their clients' higher risk
profiles.

WHAT ARE SOME OF THE WAYS INSURANCE COMPANIES TRY TO

PROTECT THEMSELVES FROM ADVERSE SELECTION?

1. Risk assessment and underwriting : Because of issues of adverse selection, these insurers
makes sure to know and find details about a person’ s illness or state of health before,
medical history and other relevant information before enrolling him or her into the
insurance policy. Through, the process of underwriting, they are able to prevent or
exclude high risk individuals or conditions that will make them incur huge loses.
2. Exclude certain illness: The insurance policies enact strict regulations or laws that
exclude illness that are mostly chronic and takes time, money for treatment. This issuance
of insurance policy laws helps prevent risk aversion, especially to those who are likely to
hide or pretend not to be having a chronic illness.
3. Diversification of products: Various insurance companies have different insurance
premiums regarding different cases and treating illness is also not an exception. Different
products and charges may be different relation to the aged, youth, toddles, as they see the
aged to have a high risk of frequently being ill. Different products may also be associated
 with chronic or easily treatable illness and emergency cases. Hence, there are different
products assigned depending on age group, illness, and frequency of visits to the hospital.
4. Waiting periods: Sometimes, patients rush to enroll in and insurance policy when they are
faced with some illness. Because of that, various insurers sometimes take time before
they enroll a patient to prevent payment of illness of the patient even at the beginning of
the premium when the patent has paid nothing or less to deserve that kind of payment
from the insurers. Some insurance companies, may require an individual to pay up to
about half a year or even a year before they can make payment to any uncertain illness or
sickness. The period where the patient has to wait before the insurance fully works is the
waiting period.