Adverse selection occurs when:

Adverse selection occurs when one party to an exchange has more or better information than the other, which results in the party with information imbalance being able to exploit the unaware party. In the insurance industry, adverse selection refers to when people with greater likelihoods of filing claims purchase more insurance coverage than those with lower likelihoods, as the latter are less likely to pay the high premiums. As a result, the average risk of insurance companies' customers rises, which leads to higher premiums.