What is the adverse selection problem and how does it impact the insurance industry?

The adverse selection problem occurs when individuals with higher risks are more likely to seek insurance coverage than those with lower risks. This can lead to higher costs for insurance companies, as they may end up covering a disproportionate number of high-risk individuals. As a result, insurance premiums may increase for everyone, making insurance less affordable for those who are lower risk. This can create challenges for the insurance industry in maintaining a balanced risk pool and pricing policies effectively.