How do underwriters manage adverse selection in life and health insurance?

• A. By requiring medical underwriting, evaluating risk factors, and possibly excluding or rating higher for high-risk individuals.
• B. By ignoring medical histories to speed up approvals.
• C. By offering discounts for high-risk individuals.
• D. By randomly selecting applicants.

Answer: (D)

Adverse selection is controlled by underwriting that uses health information to separate applicants by risk and price accordingly. Underwriters review medical histories, risk factors (age, smoking, family history, existing conditions), and may require medical exams or lab results to gauge likely mortality or morbidity. Based on that assessment, they can approve coverage at standard rates, apply a higher premium (rating up), attach exclusions or riders, or in some cases decline the application. This pricing and term differentiation helps ensure the pool remains balanced and prevents high-risk individuals from disproportionately driving up costs. Ignoring medical histories, offering discounts to high-risk individuals, or randomly selecting applicants would fail to reflect true risk and worsen adverse selection.