Insurance is useful for all the people for covering for some of the needs which will occur due to unexpected incidents. But, there are many situations which is making the people not to use the insurance. One of the main cases is the adverse selection of the insurance.
Insurers often use this phrase "adverse Selection". It describes the method, where the insured decides to buy or not to buy the insurance according to the risks. These risks are not known to the insurer.
Suppose take two persons A and B. Consider A, who knows that he will buy an insurance tomorrow, but this information is not known to the insurer and he will buy a insurance and will get a good deal as the price will be in relation with the average risk of death. Suppose, conversely if we take the case of B, who thinks she will live for a long time than the average person, then insurance will not be beneficial in those cases. Which finally results in a situation that the insurance will be brought only by the high risk individuals.
Several unprofitable situations may arise for the insurers as the adverse selection may lead to end up the insurances or cancel out their renewal of the lower risks. Sometimes, this collapses the insurance market.
So, in order to avoid the above adverse selection, the insurers came up with the process called underwriting which deals with the risk selection process. In which the insurers will ask different questions and sometimes even ask the medical reports for evaluating the health of the insured who has applied for buying the insurance. According to the information of the health reports, the prices may vary.
So, underwriting is the tool by which most of the insurers avoid the adverse selection of the insurance. Hence, the advantageous selection will result because of the effective underwriting.
Insurers often use this phrase "adverse Selection". It describes the method, where the insured decides to buy or not to buy the insurance according to the risks. These risks are not known to the insurer.
Suppose take two persons A and B. Consider A, who knows that he will buy an insurance tomorrow, but this information is not known to the insurer and he will buy a insurance and will get a good deal as the price will be in relation with the average risk of death. Suppose, conversely if we take the case of B, who thinks she will live for a long time than the average person, then insurance will not be beneficial in those cases. Which finally results in a situation that the insurance will be brought only by the high risk individuals.
Several unprofitable situations may arise for the insurers as the adverse selection may lead to end up the insurances or cancel out their renewal of the lower risks. Sometimes, this collapses the insurance market.
So, in order to avoid the above adverse selection, the insurers came up with the process called underwriting which deals with the risk selection process. In which the insurers will ask different questions and sometimes even ask the medical reports for evaluating the health of the insured who has applied for buying the insurance. According to the information of the health reports, the prices may vary.
So, underwriting is the tool by which most of the insurers avoid the adverse selection of the insurance. Hence, the advantageous selection will result because of the effective underwriting.
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