What can be a consequence of adverse selection for insurance companies?

Adverse selection refers to a situation where insurance companies attract a higher proportion of high-risk individuals compared to low-risk individuals, due to a lack of information or transparency about the risk levels of potential insureds. This phenomenon can lead to several important consequences for insurance companies.

Increased premiums for all insured individuals is one significant outcome. When insurers face a higher proportion of claims due to insuring more high-risk individuals, they may need to raise premiums for all customers to counterbalance the potential losses and maintain profitability.

Lower profit margins can also occur as insurers find that the cost of claims associated with adverse selection outweighs the income generated from premiums. If the claims are consistently higher than expected, the company's overall profitability can suffer, leading to tight margins.

Additionally, adverse selection results in higher risk pools of insured individuals. This means that the composition of the insurance pool becomes skewed towards those who are more likely to file claims, further exacerbating the problem of higher overall claims and increasing the need for premium adjustments.

Thus, each of these consequences is interconnected and arises from the same fundamental issue of adverse selection, making the overall answer inclusive of all the described options.