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) lead to a rise in average price and a fall in numbers insured. But they also lead 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.
Teaching materials: 10-minute presentation (can be freely re-used or adapted, no attribution necessary).
loss coverage blog