Which of the following best describes 'adverse selection'?

Adverse selection refers to a situation in the insurance market where individuals who perceive themselves to be at higher risk are more likely to seek out insurance coverage than those who consider themselves low-risk. This phenomenon occurs because those with a greater likelihood of making a claim are more inclined to purchase insurance, while those with lower risk may opt out, leading to a pool of insured individuals that skews towards higher risk.

This dynamic can result in insurers facing greater claims than anticipated, which can undermine their financial stability if not managed properly. In summary, the best description of adverse selection is indeed that it is a situation where only high-risk individuals purchase insurance, making this option the most accurate representation of the concept. The other choices pertain to different aspects of insurance and do not capture the essence of adverse selection.