Ms. Smith has insurance through her employer and signed up for full dental insurance just before her daughter required braces. When her daughter stopped wearing braces, she dropped the dental coverage. This is an example of:

Information asymmetry in insurance occurs when the insured party possesses more knowledge about their likely future healthcare needs than the insurer. This lead to behaviors that destabilize the risk pool, as individuals only enter or exit the market based on their anticipated costs. This phenomenon impacts premium pricing and the overall sustainability of private and employer-based health insurance plans. Rationale: A. Supplier-induced demand occurs when a healthcare provider influences a patient's demand for care to align with the provider's interests, such as increasing revenue. In this scenario, the decision to get and drop insurance was made by the consumer, not the dentist. There is no evidence of a provider over-prescribing services or products here. B. Catastrophic hazard refers to an unpredictable, large-scale event that causes massive losses for an insurance company, such as a natural disaster. Braces for a child represent a predictable, personal healthcare expense rather than a systemic threat to the insurer. It does not fit the definition of a catastrophic risk in health economics. C. Adverse selection occurs when individuals with a high probability of loss (high risk) are more likely to purchase insurance, while those with low risk drop out. Ms. Smith chose to insure only when she knew expenses were imminent and canceled when the risk subsided. This behavior creates a risk imbalance that can lead to increased costs for all insured members. D. Moral hazard refers to the tendency of insured individuals to consume more healthcare services simply because they are not paying the full cost out of pocket. While Ms. Smith used the insurance, the primary issue is the timing of enrollment based on known future needs. This specific act of joining and leaving is the hallmark of asymmetric risk selection.