Adverse selection occurs when one party in a transaction has more information than the other, leading to an imbalance. This often happens in markets like insurance, where individuals with higher risks are more likely to seek coverage, while those with lower risks may opt out. As a result, insurers may end up with a pool of clients that is riskier than anticipated. This phenomenon can lead to higher premiums for everyone, as insurers must compensate for the increased risk. To mitigate adverse selection, companies often use strategies like medical exams or questionnaires to better assess the risk levels of potential clients, ensuring a more balanced risk pool.