Adverse Selection: Is Discrimination Warranted?

Adverse selection is defined as a situation in which sellers of goods or services have more information than buyers (or have information that they do not have) and vice versa. The issue is especially relevant for the insurance businesses since adverse selection is usually a tendency for individuals with high-risk jobs and lifestyles to get insurance. To provide an example, Wheelan’s discussion about how insurance policies work can be mentioned. For instance, the author hypothetically established $1,300 insurance policy (Wheelan 113). For healthy fifty-year-old men, such a price is a bad deal while for smokers and overweight clients, the policy is a very good deal (Wheelan 113).

We will write a
custom essay
specifically for you

for only $16.05 $11/page
308 certified writers online
Learn More

Therefore, healthy men are more likely to opt out of the insurance while those with adverse health conditions will opt in, which will lead to the change in the population of men that was the initial target of the premium. In this case, insurers will increase the price to $1,800 in order to make a profit. At the new price, the most healthy individuals from the ‘unhealthy’ group will opt out of the program because it will be a bad deal for them while the least healthy will still opt in because even the higher price will be a good deal for them (Wheelan 113). Again, the population of pool changes to include the unhealthiest individuals while the price of $1,800 is still not enough for covering all health costs. In theory, this adverse selection may go on until reaching a complete failure of the health insurance market.

Based on the example provided above, it can be argued that adverse selection indeed justifies and explains discrimination. In order for insurers to break even, as well as subsequently get a profit, the premium should be higher in price for lower-risk individuals, which will make it cheaper for the high-risk population. Discrimination in pricing is, therefore, necessary to ensure that insurance companies reach the desired level of adverse selection that allows them to get the desired profit. At the moment, the insurance market gets a ‘free pass’ on discriminatory practices because without filtering through the target audience, it will be impossible to sustain the business.

It is important to mention that any policies targeted at making health insurance more affordable and accessible will have a negative influence on adverse selection. When individuals more likely to get sick receive an affordable insurance premium, companies are unable to sustain themselves and provide insurance services altogether. As mentioned by Wheelan, if individuals are promised that they get affordable insurance coverage regardless of their healthcare status, the best time for purchasing it will be right before visiting an emergency room, which is ethically unfair to insurers (115). On the other hand, despite the fact that adverse selection allows businesses to discriminate against clients, it is vital to their success.

In conclusion, it should be stated that adverse selection justifies discrimination because it contributes to business sustainability. As prices on insurance rise, adverse selection works in such a way that the least profitable clients opt out of the established policies. At the present moment, there is an ethical problem with discrimination to warrant adverse selection and make less healthy clients to pay more; however, on the other hand, it is unfair to allow them to pay less despite their chances of getting ill are higher.

Work Cited

Wheelan, Charles. Naked Economics: Undressing the Dismal Science. W. W. Norton & Company, 2010.

Print Сite this

Cite this paper

Select style

Reference

StudyCorgi. (2021, June 25). Adverse Selection: Is Discrimination Warranted? Retrieved from https://studycorgi.com/adverse-selection-is-discrimination-warranted/

Work Cited

"Adverse Selection: Is Discrimination Warranted?" StudyCorgi, 25 June 2021, studycorgi.com/adverse-selection-is-discrimination-warranted/.

1. StudyCorgi. "Adverse Selection: Is Discrimination Warranted?" June 25, 2021. https://studycorgi.com/adverse-selection-is-discrimination-warranted/.


Bibliography


StudyCorgi. "Adverse Selection: Is Discrimination Warranted?" June 25, 2021. https://studycorgi.com/adverse-selection-is-discrimination-warranted/.

References

StudyCorgi. 2021. "Adverse Selection: Is Discrimination Warranted?" June 25, 2021. https://studycorgi.com/adverse-selection-is-discrimination-warranted/.

References

StudyCorgi. (2021) 'Adverse Selection: Is Discrimination Warranted'. 25 June.

Copy to clipboard

This paper was written and submitted to our database by a student to assist your with your own studies. You are free to use it to write your own assignment, however you must reference it properly.

If you are the original creator of this paper and no longer wish to have it published on StudyCorgi, request the removal.

Psst... Stuck with your
assignment? 😱
Susan
Online
Psst... Stuck with your assignment? 😱
Do you need an essay to be done?
Yes
What type of assignment 📝 do you need?
Yes
How many pages (words) do you need? Let's see if we can help you!
Yes