What is it called when only those expecting a loss purchase insurance?

The correct term for the situation where only individuals or entities that anticipate a loss purchase insurance is known as adverse selection. This phenomenon occurs because those most likely to suffer a loss are the ones motivated to obtain insurance, which can lead to an imbalance in the insurance pool. Insurers may find themselves covering a higher number of high-risk individuals than expected, which can ultimately affect their ability to price premiums appropriately and may lead to financial instability.

In relation to the other concepts, pooling of risks refers to the practice of grouping together multiple policyholders to spread the financial risk of loss across a larger number of people, not limited to only those who foresee a loss. Insurable interest is the requirement that the policyholder must have a legitimate interest in the insured item, ensuring that they would suffer a financial loss if the item were to be damaged or lost. Moral hazard describes the situation where the behavior of the insured individual changes as a result of having insurance coverage, potentially leading to increased risks or losses. Each of these terms plays an important role in the overall insurance framework, but adverse selection specifically addresses the issue of who chooses to buy insurance based on their expectations of loss.