ABSTRACT
G e n e ra lly speaking policies are no t availab le at ages m a teria lly greater than s ix ty -five . . . . T h e term prem ium s are too high fo r a n y b u t the m ost pessimistic (w hich is to say the least h e a lth y ) insureds to find attractive. T h u s there is a severe problem o f adverse selection at these ages*
T h e re is potentia l adverse selection in the fact tha t h ea lthy term in surance p o licy holders m a y decide to term inate th e ir coverage w hen the y be come older and prem ium s m ount. T h is action could leave an insurer w ith an undue p roportion o f below average risks and claims m ig h t be higher than anticipated. A dverse selection “ appears (o r at least is possible) w henever the in d iv id u a l o r group insured has freedom to b u y o r n o t to b u y , to choose the am ount o r p lan o f insurance, and to persist o r to discontinue as a po licy holder.” 4
1. A rro w ’s fine article, “U n ce rta in ty and M edical C are” ( A m er ica n E c o n o m ic R e v ie w , V o l. 53, 1963), does no t m ake this p o in t exp lic itly . H e em phasizes “ m oral hazard” rather than “ adverse selection.” In its strict sense, the presence o f “ m ora l hazard” is equally disadvantageous fo r both govern m ental and p riva te program s; in its broader sense, w hich includes “ adverse selection,” “ m ora l hazard” gives a decided advantage to governm ent insurance program s.
