Which term describes when an insurer takes on too many high-risk policies?

The correct term for when an insurer takes on too many high-risk policies is adverse selection. Adverse selection occurs when there is an imbalance in the risk pool, primarily due to the fact that individuals who are more likely to require insurance are also more inclined to purchase it. This situation often arises when insurers are unable to accurately assess or price the risks associated with the policies they are underwriting.

When an insurer experiences adverse selection, it can lead to a concentration of high-risk policyholders, which can subsequently increase the likelihood of claims. This could result in financial losses for the insurer, as they may not have enough low-risk policyholders to balance out the higher claims from the high-risk group.

In contrast, risk pooling, underwriting, and reinsurance serve different purposes within the insurance framework. Risk pooling is a method that spreads the risk among a larger group of policyholders, which helps stabilize premiums. Underwriting is the process of evaluating and selecting risks to determine coverage eligibility and premium pricing. Reinsurance involves one insurance company transferring a portion of its risk to another insurer to minimize the chance of a catastrophic loss impacting its financial health. Understanding these distinctions is crucial for grasping the nuances of insurance risk management.