Adverse selection happens when a product or service is selected by only a certain group of people who offer the worst return for the company, according to EconomicsHelp. When adverse selection happens, a company loses profit because they are putting out more money than they are taking in.
Adverse selection is most often seen in the health insurance market when coverage for healthy people is not mandatory. When healthy people do not purchase insurance but sick people do, the insurance company loses money because it is paying out more for medical bills than it is bringing in through premiums. This results in insurance companies barring sick people from purchasing coverage.