What occurs when individuals purchase insurance against their better health interest?

When individuals purchase insurance against their better health interest, it is classified as anti-selection. Anti-selection occurs when individuals who are more likely to require insurance coverage, due to their poorer health or higher risk of claims, are more inclined to buy extensive insurance policies. This behavior can lead to higher costs for insurance providers because the insured population is more likely to file claims than a healthier population.

By contrast, healthy selection refers to the tendency for healthier individuals to purchase insurance, which balances the risk for the insurer. When market behavior operates normally, insurers expect a mix of claims from both healthy and less healthy individuals. However, when an overwhelming number of high-risk individuals enter the market, it creates an imbalance. This affects the overall sustainability of the insurance model and can lead to increased premiums or changes in policy offerings to mitigate the risk associated with anti-selection. Understanding this dynamic is critical for both consumers and insurers in managing risk effectively.