What is an unfavorable selection?
The unfavorable selection is a financial transaction in which a negative result is experienced due to lack of access to information. This term is often used in the insurance industry and is, as a result, strongly associated with the insurance, but may also occur in other markets. The Nobel Laureate George Acerlof is an important figure in the field of unfavorable selection and how it happens. The party that lacks this information shall be decided on the basis of the information to which it has access. In this way, they will expose the risk of financial harm as a result of unfavorable selection. The more likely it is, the greater the policy that the customer will use to obtain. When such a person AccomacPojebníšťání nástvoješnost, the insurance company sets the risks of insurance policies on average people with similar profiles and sets rates accordingly and do not realize that the customer is a special risk. If the customer causes damage and submits to the claim, the insurance company will become a victim of an unfavorable selection.
In the case of a single insurance contract, this may not seem like the end of the world. After all, the insurance company provides a service that is rooted when paying demands. However, if insurance companies are primarily patronized by people who know that they will meet claims, companies can pay more claims than to receive in premiums because the premiums are based on average risks. Since a group of customers are selected from people with higher risk, the average risks of the insurance company are not based on the task everyone pays enough to cover all claims.
Negative selection, as is also known, can fight in many ways. One way is the regulation that all parties in the store have access to relevant information to prevent the imbalance of information that leads to unfavorable selection. In the case of insurance, another option is a mandate that forces everyone to obtain a insurance policy. It spreads rIziko on a large group of people and balances people prone to claiming people who do not claim. However, people who do not need insurance can claim that it is unfair to force them to buy insurance to pay for others.