Death Spiral

CORE DEFINITION

Death spiral refers to a vicious cycle in the operation of health insurance products where changes in the composition of insured individuals cause premiums to rise continuously, ultimately leading to the product's failure. Influenced by adverse selection, when the product is priced too uniformly, its value to high-risk groups far exceeds that to low-risk groups—for example, the elderly benefit significantly while young and healthy individuals gain almost nothing—causing healthy people to exit the product because they do not receive reasonable claims commensurate with their premiums. After the composition of insured individuals changes, the covered population still maintains high claim costs, and the loss ratio increases, so the insurance product's pricing will be adjusted upward accordingly, leading more healthy people to exit. This cycle continues, eventually preventing the insurer from reasonably spreading costs, and the product fails. The term first appeared in the 1998 paper "Adverse Selection in Health Insurance" by Cutler and Zeckhauser, which explicitly mentioned the "adverse selection death spiral."