to compensate for the observed amount of successful adverse selection that results from people applying the above heuristic.

Actually, I think that for voluntary insurance, the observed adverse selection is negative, but I can't find the cite. People simply don't do cost-benefit calculations. People who buy insurance are those who are terribly risk-averse or see it as part of their role. Such people tend to be more careful than the general population. In a competitive market, the price of insurance would be bid down to reflect this, but it isn't.