What is the term for insuring risks that are more prone to loss than average risks?

The correct term for insuring risks that are more prone to loss than average risks is called adverse selection. Adverse selection occurs when there is an imbalance in the information available between the insurer and the insured. Individuals or groups who have a higher likelihood of making a claim are more likely to seek insurance coverage, which can lead to a disproportionate amount of high-risk cases within an insurance pool. This situation can be problematic for insurers, as they may end up covering a larger number of high-risk individuals than they initially anticipated, which can lead to significant financial losses.

In the context of insurance, adverse selection illustrates why companies often engage in underwriting practices to assess risk and determine appropriate premiums. By understanding the risks involved, insurers aim to mitigate the effects of adverse selection and maintain a profitable balance in their risk pools.