Question

Imagine a California disaster preparedness program that subsidizes seismic insurance premiums, to help homeowners living in earthquake prone areas afford the coverage. Critics say such insurance is unsustainable financially, due to what they call “adverse selection.” They argue that only those homeowners who live in highest earthquake-risk areas, and who are least willing to pay for seismic upgrades to their own homes, will be interested in obtaining the coverage. Would these critics’ application of the “adverse selection” concept be appropriate? Why or why not?

Answer 1

Before answering to question that why or why not adverse selction can be appropriate, I would first like to define what is "adverse selection" in case of Insurance

Definition- Adverse selection is the criteria where information related to some aspect of the quality of product is only available with one of the party i.e either buyer or seller. It is therefore the tendency of those in dangerous jobs or high-risk lifestyles to purchase life or disability insurance where chances are greater they will collect it.

Answer- No, Critics for selecting this is an adverse selection is not appropriate, Adverse selection occurs only when is unequal information between buyers and sellers, But in the earthquake situation it cannot be the case as information like high prone to earthquake will be available to both.