How can insurers prevent adverse selection?

Insurers can effectively prevent adverse selection by implementing strict insurability standards. Adverse selection occurs when individuals with a higher risk of loss are more likely to purchase insurance, while lower-risk individuals may opt out. By enforcing rigorous underwriting criteria, insurers can assess the health, behaviors, and backgrounds of applicants to identify and differentiate between high-risk and low-risk individuals.

This careful evaluation helps insurers maintain a balanced risk pool, ensuring that they collect premiums from a more diverse group, which includes a larger percentage of lower-risk policyholders. As a result, the company is less likely to face disproportionate claims that could compromise its financial stability.

While the other options may seem like ways to engage customers or enhance policies, they do not directly address the core issue of managing risk selection. Lowering premiums could attract more high-risk individuals, offering blanket policies may not necessarily filter risk levels, and increasing advertising focuses on awareness rather than risk assessment. Thus, emphasizing strict insurability standards is a focused strategy to mitigate the challenges posed by adverse selection.