Difference Between Anti-Selection and Adverse Selection

Anti-selection describes a rise in the possibility that a person may cancel their pre-existing contract because they are confident that demands and needs exceed what the service provider has included in the package.

An example would be when a person has a preexisting condition and the insurance is far lower than what would be required to cover the condition.

Since sick individuals are more likely to join in insurance, the company is forced to raise prices to pay the claims, which ultimately drives away healthier people.

Adverse selection is an example of asymmetric information which refers to a situation where one party has lesser knowledge than the other.

Consequently, the party with less knowledge has a higher chance of ending up at loss.

In insurance adverse selection applies both ways. If the buyer decides not to disclose full information about their health then they can end up being in profit as a result putting the company at a loss and vice versa.

Comparison Table Between Anti-Selection and Adverse Selection

Parameters of comparisonAnti-selectionAdverse selection
DefinitionBehavior change after the agreementLack of symmetry in information before the subscription of the contract
Legal consequenceOne of the parties could face legal consequencesNo legal consequences
NatureEffectCause

What is Adverse Selection?

Adverse selection refers to a situation where either the seller or buyer has more information than the other. They can use that information for their benefit eventually putting the other party at loss.

There are two situations in this scenario. When those in high-risk or risky activities purchase life insurance, adverse selection is at play.

Here, the customer has better knowledge about their health and may take benefit from this by withholding particular information.

In the same way, if the company decides to withhold some information that can be a disadvantage to the consumer.

When an insurance company sells premiums at a greater cost than is reasonable based on the incentives they are giving to uninformed clients.

The buyer ultimately ends up buying the package at much higher than the actual cost.

Another example of adverse selection is a current global issue where insurance companies extract the genetic information of a client.

They then decide whether that person is illegible to be insured or not based on the genetic information.

On the other hand, there are individuals who use their genetic information to get insurance.

What is Anti-Selection?

Anti-selection is when a person decides to withdraw their insurance contract because it is evident to them that the illness they have is far more serious than what the insurance company is offering them in their package.

That person is sure that due to this he will be at a loss rather than benefit because of the insurance and hence decides to withdraw from their subscription.

As a result of this, the insurance company is forced to increase their package so that sick people would sign up.

This consequently pushes away those who are in healthier conditions.

A shortage of healthy people might also affect the overall amount of premiums received by the insurance company.

As a result, the insurance company is forced to raise health insurance prices to make up the shortfall.

However, because of rising health-care expenses, more healthy people may quit their policies.

Main Differences Between Anti-Selection and Adverse Selection

  1. Anti-selection is the change in behavior of a consumer after purchasing a deal. The consumer feels that the current plan he acquires is not sufficient or his needs as a result decides to opt out. While the adverse selection is the asymmetry of information on either side of the deal between two parties
  2. In some cases of anti-selection the parties might face consequences for terminating the contract however that is not the case in adverse selection
  3. Adverse selection is the cause while anti-selection is often the result of adverse selection.

Conclusion

Anti-selection is when a party withdraws from a contract because they believe that the package they have subscribed to is not beneficial enough for them or putting them at loss.

They believe their requirement or condition is way more demanding than what the seller or company is offering them hence they decide to opt-out of the pre-existing contract.

Adverse selection is when there is an asymmetry of information between a consumer and a service provider.

It occurs when sellers have information that consumers do not have and they decide to use that information for their benefit.

Or when the consumer holds some information that could benefit them hence putting the other party at loss such as in the case of insurance holders who do not reveal full information about their health to the company. There is information asymmetry between the two parties in both anti-selection and adverse selection. The key distinction is when it happens. In an anti-selection scenario, one party’s attitude changes after the agreement are reached. However, there is a lack of symmetric knowledge before the contract or agreement in adverse selection.

Search for "Ask Any Difference" on Google. Rate this post!
[Total: 0]
One request?

I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️