Definition: It occurs when there are information asymetries and difficulties in selecting customers. This term is used in insurance, economics, risk management and statistics. For example, in insurance, a firm has to identify different customer groups in order to decide the premiums. This is why health insurance premiums are higher for smokers and obese people. If the insured hides certain pertinent information from the insurer, the insurer will determine the wrong risk profile of the insured, and so the wrong premium.