Answer: Adverse selection

## Explanation **Adverse selection** is the correct answer because it refers to the situation where 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 - These high-risk individuals are more likely to apply for insurance coverage - The insurance company faces the risk of disproportionately attracting bad risks **Why the other options are incorrect:** - **Investment risk (A)**: Refers to risks associated with investment portfolios, not underwriting decisions - **Underwriting risk (B)**: While related, this is broader and includes all risks from the underwriting process, not specifically the phenomenon of attracting bad risks - **Operational risk (C)**: Refers to risks from inadequate or failed internal processes, people, and systems, not specifically to risk selection in insurance Adverse selection occurs because high-risk individuals have more incentive to purchase insurance, creating an imbalance in the risk pool that can lead to financial losses for the insurer if not properly managed through risk assessment and pricing.

Author: LeetQuiz .