Which of the following best describes adverse selection in insurance?

Adverse selection refers to the phenomenon where an insurance provider faces a disproportionate amount of applicants who are at higher risk of making a claim compared to the general population. This situation occurs when individuals who anticipate needing insurance are more likely to seek it, while those who perceive themselves as lower-risk may opt out.

The correct option highlights that adverse selection arises when a significant number of high-risk individuals apply for coverage. This can lead to potential financial imbalances for insurance companies, as they may collect premiums from a population more likely to utilize the benefits, ultimately increasing the likelihood of claims and escalating costs.

In contrast, other options touch on elements related to insurance but do not adequately capture the essence of adverse selection. For instance, high premiums leading to fewer applicants could signify a market response to risk but doesn't directly denote the selection issue itself. The situation where healthy individuals do not enroll might hint at adverse selection but does not encompass the full picture as it suggests a lack of participation among low-risk individuals. Lastly, the process of evaluating potential risks is more about underwriting and risk assessment rather than the selection dynamics at play within the insurance pool.