Adverse Selection Example Assume a group of 300 potential insureds for health insurance High Risk Group (100 potential insureds) Expected Annual Cost of Health Care Expenditures = $3600 Medium Risk Group (100 potential insureds) Expected Annual Cost of Health Care Expenditures = $2400 Low Risk Group (100 potential insureds) - L M Expected Annual Cost of Health Care Expenditures = $1200 Assume that the insurer is unable to distinguish one risk class from another and yet the insureds have good information on their own particular risk What would be the expected cost per insured if all 300 were insured? What problem would the insurer encounter if this expected cost was charged and then the insureds were able to elect not to participate? What could the insurer do to prevent this problem?

Adverse Selection Example - Assume a group of 300 potential insureds for health insurance - High Risk Group (100 potential insureds) - Expected Annual Cost of Health Care Expenditures =$3600 - Medium Risk Group (100 potential insureds) - Expected Annual Cost of Health Care Expenditures =$2400 - Low Risk Group (100 potential insureds) - Expected Annual Cost of Health Care Expenditures =$1200 - Assume that the insurer is unable to distinguish one risk class from another and yet the insureds have good information on their own particular risk What would be the expected cost per insured if all 300 were insured? What problem would the insurer encounter if this expected cost was charged and then the insureds were able to elect not to participate? What could the insurer do to prevent this