Adverse selection
Also known as: Anti-selection
The effect of disproportionately attracting the worst risks, because the price on offer is too good for them and too poor for everyone else.
At Zarv
Up to 31% less adverse selection once behavior enters the quote.
When you price on a handful of rating variables — vehicle, age, ZIP code — everyone in a band pays the same. For a low-risk applicant that price is expensive, and they shop elsewhere. For a high-risk one it is cheap, and they stay. The book degrades on its own, with nothing visible having changed.
The problem is not missing data, it is missing discrimination between profiles that look identical on the application. Two drivers with the same car, age and ZIP code can carry opposite risk behavior, and nothing in the form reveals it.
Bringing behavioral signal into the quote separates them before binding. In cases Zarv measured, that cut adverse selection by up to 31% — not by declining more people, but by charging each one the price their actual risk implies.
Frequently asked questions
What is adverse selection in insurance?
It is the tendency of a policy priced on too few variables to attract the applicants for whom that price is a bargain, meaning the higher risks, while lower risks leave. Over time the pool worsens and losses rise faster than premiums.