From a public policy perspective, insurance works better with some adverse selection.
Under adverse selection, restrictions on insurance risk classification (e.g genetic tests, gender, big data) may lead to a rise in average price and a fall in numbers insured (both usually seen as disadvantages). But as a matter of simple arithmetic, they also lead to in a shift in coverage towards higher risks – the ‘right ‘ risks, the people who need insurance most. If this shift in coverage is large enough, it can more than out-weigh the fall in numbers insured, so that expected population losses compensated by insurance rises – that is, loss coverage rises.
Three-minute version: here.
loss coverage blog