Adverse Selection

In this Demonstration, blue represents low risk and purchases insurance, orange represents low risk and does not purchase insurance, green represents high risk and purchases insurance, and red represents high risk and does not purchase insurance. The absence of a particular color group from the figure means that, given the characteristics of the pool and the risk classification system employed, no one falls into that category. Thus, when risk aversion is set very high and the utility gain from risk reduction increases commensurately, there is sometimes an absence of red or orange points.