Answer: Adverse selection

## Explanation **Adverse selection** occurs when individuals with higher risk profiles are more likely to seek insurance coverage than those with lower risk profiles. In this scenario: - Applicants with multiple traffic violations and accidents represent higher-risk individuals - They are more likely to apply for insurance coverage - This creates an imbalance where the insurance pool contains disproportionately more high-risk individuals - The insurance company faces increased claims probability and potential losses **Why other options are incorrect:** - **Investment risk (A)**: Relates to risks from investment activities, not underwriting - **Underwriting risk (B)**: Refers to the risk of incorrect premium pricing, but adverse selection specifically addresses the composition of the insured pool - **Operational risk (C)**: Concerns internal processes, systems, or human errors, not the selection of policyholders

Author: LeetQuiz Editorial Team