People will be more likely to take out insurance contracts when they believe their risk is higher than the insurance company has allowed for in the premium. This is known as anti-selection. An example in critical illness cover may be where an individual begins to suffer pains in the chest. He takes out a policy without mentioning the chest pains and then goes to the doctor to see if the pains are due to heart disease. If they are, then there is a greater likelihood of a claim for benefit. Anti-selection is also recognised in the tendency for sick or sub-standard lives legitimately to renew policies or take up options providing additional cover without evidence of health.
An insurer is exposed to the risk of anti-selection if a policyholder can make use of information not available to the insurer to obtain insurance cover that would not have been granted if the insurer had had the information, or to obtain cover on more favourable terms than would have been granted by the insurer. An insurer may also be exposed to the risk of anti-selection by failing to make use of available, relevant information.
People will be more likely to take out contracts when they believe their risk is higher than the insurance company has allowed for in its premiums. This is known as anti-selection.
Anti-selection can also arise where existing policyholders have the opportunity to exercise a guarantee or an option. Those who have most to gain from the guarantee or option will be the most likely to exercise it.
Entries from The Actuarial Profession's Glossaries has been produced by the Profession and is reproduced with the Profession's permission. The Actuarial Profession does not accept liability for the complete accuracy of the original material, given that it was prepared for educational purposes only.