Final answer:
When an insured individual travels to a state with higher insurance requirements, their insurance company typically raises the coverage to meet that state's minimums. However, insurance regulation trying to mandate low premiums can lead to insurers avoiding investment in high-risk individuals or withdrawal from the market.
Step-by-step explanation:
If the insured is in an accident in a state with higher limits, the insurance company will generally adjust the coverage to meet the minimum requirements of that state, and this adjustment typically comes with no additional premium due. This practice is often referred to as 'broadening clauses' within insurance policies and is designed to protect insured drivers when they cross into territories with different insurance mandates. However, while insurance regulators may require companies to adjust coverage, the fundamental law of insurance dictates that the average amount received by insured individuals cannot exceed the amount paid in premiums over time.
When state legislatures impose regulations to set low premiums, insurers tend to avoid high-risk and medium-risk clients to maintain profitability. If required by law to offer insurance at low prices to everyone, insurers have the choice of ceasing operations in that state. Instances include numerous insurers withdrawing from New Jersey and State Farm's exit from selling property insurance in Florida. Engaging in such market withdrawals is a strategic decision for insurance companies facing an environment where premiums are artificially suppressed.
If insurers were to charge a fair premium to the entire group rather than to individual risk segments, they could face a higher likelihood of adverse selection. Government mandates requiring the purchase of insurance, like auto insurance, can alleviate adverse selection to some extent. However, insurers are not forced to sell policies at low costs, and thus, they may still avoid high-risk individuals to prevent potential losses.