What is the term for the phenomenon when insuring risks that have a higher likelihood of loss than average risks?

The term for the phenomenon when insuring risks that have a higher likelihood of loss than average risks is known as adverse selection. This occurs when individuals who have a higher risk of making a claim are more likely to seek insurance coverage compared to those who are at average or lower risk. As a result, insurers may end up with a disproportionate number of high-risk policyholders, which can lead to increased claims and losses for the insurance company.

Adverse selection is a critical concept in the insurance industry because it forces insurers to implement measures to properly assess risk and set premiums accordingly. This can include medical underwriting, requiring detailed questionnaires, or conducting examinations before issuing policies. These practices help to mitigate the potential negative impacts of adverse selection by ensuring that the insured population is more balanced in terms of the risk profile.

In this context, the other terms do not specifically refer to the phenomenon of insuring higher-risk individuals. "Lapse" pertains to the termination of a policy due to non-payment of premiums, while "insurance" and "life insurance" are general terms that describe the broader concepts of risk management and specific coverage types, rather than the specific situation of adverse selection.