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Problem of asymmetric information that disturbs the operation of the insurance market, resulting in an inequitable transaction. The insured, knowing the likelihood of events, chooses to insure against only those that pose a strong risk. The insurer, having less information, accepts a contract that does not include premiums for low-risk events. The insured gains from the insurer’s inability to distinguish “good” and “bad” risks.

Parties to a transaction have uneven access to relevant information that governs an informed choice. Such asymmetry can result in an inequitable transaction in favor of the party with the most information, or it can result in the abandonment of the exchange. See adverse selection.