Final answer:
Insurance contracts are contracts of utmost good faith and are personalized to the risk profile of the insured individual, hence a policy typically cannot be transferred when a car is sold. Insurance functions to offer financial protection against covered events, but it can be influenced by factors such as adverse selection, moral hazards, and governmental regulations.
Step-by-step explanation:
If an insured sells his car to another person, the buyer may be prohibited from also receiving the insured's policy. This is because the insurance contract is a contract of utmost good faith (uberrima fides), which requires that there be full transparency and disclosure between the parties involved. Since the insurance policy was created based on the insured's risk profile, the transfer of the policy to a new owner, who has a different risk profile, would not maintain the principle of utmost good faith.
Insurance serves as a method of protecting a person from financial loss, whereby policyholders make regular payments to an insurance entity, which then compensates a member of the group who suffers significant financial damage from an event covered by the policy. This system can face challenges like adverse selection and moral hazard, which the insurance industry tries to manage through regulation and risk assessment. Additionally, laws and regulations may influence whether certain types of insurance are mandatory, thereby impacting the dynamics of the insurance market.