Final answer:
The mandatory term in insurance is 'Shall,' which indicates a legal requirement. Adverse selection is countered by laws mandating insurance purchases or risk-based pricing, but companies are not forced to insure high risks at low costs. (option 2)
Step-by-step explanation:
In insurance terms, the term that is synonymous with something that is mandatory is 'Shall'. This term implies a legal obligation and is often used in legal contexts, such as laws, regulations, and insurance policies, to indicate that something must be done. Government interventions in insurance markets typically involve mandating certain kinds of insurance. For instance, auto insurance is legally required in most states for car owners. In the context of insurance, adverse selection is a significant challenge. This occurs when high-risk individuals are more likely to purchase insurance, potentially leading to financial losses for insurance companies. To counteract this, insurance providers might only offer policies to those deemed low-risk, or laws may require everyone to purchase insurance to ensure that the risk is spread across a wider population. While these laws can help mitigate adverse selection by compelling low-risk policyholders to subsidize those with higher risks, they cannot force companies to provide coverage to high-risk individuals at the same rates. Thus, insurance companies often still seek ways to avoid covering high-risk individuals.