Adverse selection arises when products of differing quality are sold at a uniform price. This pricing approach persists due to asymmetric information, where one party lacks the same level of knowledge as the other. Sometimes, buyers have more knowledge about information that is relevant to the market exchange, and sometimes sellers have more knowledge. Typically, in the insurance market, buyers have more knowledge. 

When insurers set premiums for their policies, they often lack detailed insights into the individual risk levels of their clients. Premiums are therefore based on the average risk of the pool of buyers. High-risk individuals, aware of their elevated likelihood of filing claims, are more inclined to purchase insurance than low-risk individuals. 

For example, many individuals are engaged in hazardous occupations, such as logging, construction, or offshore oil drilling. Others participate in high-risk hobbies, such as skydiving, rock climbing, or scuba diving. People with pre-existing medical conditions or risky health behaviors are also more likely to seek insurance coverage due to their increased likelihood of benefiting from it. 

In contrast, low-risk individuals with low-risk lifestyles, or individuals in excellent health, may perceive the premiums based on average risk factors as disproportionately high relative to their risk. They may not want to purchase insurance at the prevailing premiums. This inclination creates a skewed risk pool that is dominated by high-risk individuals, raising the overall cost for insurers and ultimately driving all insurance premiums higher.

This cycle of adverse selection can lead to a situation where rising premiums and an imbalanced risk pool threaten the affordability and accessibility of insurance for all participants.