The term "adverse selection" as used in the insurance business refers to the belief that people who are sick are more likely to apply for and to carry health insurance than those who are healthy. In a broader definition, the concept is that those who are insured are more likely to suffer a loss or, in the case of health insurance, to have an illness than those who are uninsured.

This line of thinking would hold, for instance, that non-smokers are liable to live longer than smokers. Therefore a life insurance policy would actually be a better "buy" for the beneficiaries of a smoker. Premiums, however, are set according to the mortality rates of the combined populations so actually non-smokers do not necessarily get preferential treatment. While this is a theory, it is arguable if the logistics play out in reality as any population that does not engage in one reckless behavior may very well engage in another.

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