Name a contractual mechanism used by insurers to control adverse selection.

• A. Deductibles
• B. Premium credits
• C. Co-payments
• D. Exclusions

Answer: (A)

Adverse selection happens when those at higher risk are more likely to buy insurance, which can push up costs for everyone in the pool. A deductible is a contractual feature that shifts some upfront cost to the insured before the insurer starts paying. By requiring the insured to bear a portion of small or frequent claims, deductibles change the cost-benefit calculation for different potential buyers.

Low-risk individuals, who expect few or no claims, are more attracted to plans with deductibles because they can pay a smaller premium and still avoid many out-of-pocket events. High-risk individuals, who anticipate more claims, face larger out-of-pocket costs before coverage kicks in, making such plans less attractive to them. This screening effect helps keep the average risk of the insured pool lower, which is how deductibles help control adverse selection.

Other options, like co-payments, premium credits, or exclusions, address different ideas—co-pays mainly affect usage, premium credits reward safe behavior, and exclusions remove coverage for specific risks. While they influence costs and coverage, deductibles serve as a more direct mechanism for screening potential buyers and mitigating adverse selection.