Final answer:
Adverse selection can occur in the case of a risk-neutral automobile insurance company. The insurance company is unable to identify the risk level of each driver, leading to the possibility of selling insurance only to high-risk drivers and incurring financial losses.
Step-by-step explanation:
Adverse selection occurs in the case of a risk-neutral automobile insurance company that insures car drivers for damages from accidents. In this scenario, the insurance company is unable to identify the risk level of each driver, but the drivers themselves know their own risk groups. As a result, the insurance company may end up selling insurance only to high-risk drivers who will likely experience large claims. This can lead to financial losses for the insurance company.