What is the term used to describe the tendency for poorer than average risks to seek out insurance?

The term that describes the tendency for poorer than average risks to seek out insurance is known as adverse selection. This phenomenon occurs when individuals who perceive themselves as having a higher likelihood of claims are more inclined to purchase insurance. For example, those with pre-existing health conditions may be more motivated to obtain health insurance than healthier individuals.

Adverse selection poses challenges to insurers, as it can lead to an imbalance in risk pools. If mainly high-risk individuals are buying insurance, it can result in increased claims costs, which may drive up premiums for all policyholders. Insurers strive to mitigate adverse selection through careful underwriting practices, setting premiums based on the risk level of different insureds, and implementing various measures to attract a more balanced risk pool.

This is distinct from risk assessment, which involves evaluating the risk factor of an individual or entity before underwriting. Underwriting bias refers to a subjective judgment or inconsistency in evaluating the risk associated with applicants, while lapse rate refers to the percentage of policyholders who discontinue their coverage.