Answer: Adverse selection

## Explanation **Adverse selection** is the correct answer because it specifically refers to the problem where insurance companies cannot distinguish between good risks (healthy individuals) and bad risks (unhealthy individuals). **Key points about each option:** - **Adverse Selection (A)**: This occurs when individuals with higher risk are more likely to purchase insurance than those with lower risk. Life insurance companies face this problem when they cannot accurately assess the health status of applicants, leading to a pool of insured individuals that is riskier than the general population. - **Catastrophic Risk (B)**: Refers to events that affect many policyholders simultaneously, such as natural disasters. This is more relevant to property insurance than life insurance. - **Longevity Risk (C)**: The risk that people live longer than expected, which affects annuity providers and pension funds more than traditional life insurers. - **Moral Hazard (D)**: Occurs when insured individuals change their behavior after obtaining insurance (e.g., taking more risks). While relevant to insurance, it's not specifically about differentiating between good and bad risks at the underwriting stage. Adverse selection is the primary concern for life insurers trying to differentiate between good and bad risks during the underwriting process.

Author: LeetQuiz Editorial Team