Answer: Adverse selection.

## Explanation **Adverse selection** is the correct answer because it specifically refers to the problem where insurance companies cannot distinguish between high-risk and low-risk individuals. In life insurance: - **Adverse selection** occurs when individuals who know they are higher risk (e.g., have health issues, engage in risky behaviors) are more likely to purchase insurance than those who are lower risk - This creates an imbalance in the risk pool, forcing insurers to charge higher premiums to cover the higher-than-expected claims - Life insurance companies are particularly concerned about adverse selection because applicants have better information about their health and lifestyle than the insurer does **Why the other options are incorrect:** - **B. Catastrophic risk**: Refers to large-scale events affecting many policyholders simultaneously (e.g., natural disasters), not specifically about differentiating between individual risks - **C. Longevity risk**: Concerns the risk that people live longer than expected, affecting annuity providers more than life insurers - **D. Moral hazard**: Occurs after insurance is purchased, when insured individuals may engage in riskier behavior because they are protected, not about initial risk differentiation Adverse selection is a classic information asymmetry problem in insurance markets where the inability to distinguish between good and bad risks leads to market inefficiencies.

Author: LeetQuiz .