Question

Which of the following statements best explains why residual market insurance programs exist?

Option 1: To maximize profits for insurance companies.
Option 2: To provide insurance coverage for high-risk individuals who cannot obtain it in the standard market.
Option 3: To decrease competition among insurance providers.
Option 4: To minimize government intervention in the insurance industry.

Answer 1

Residual market insurance programs exist to offer coverage to high-risk individuals who are usually denied insurance in the regular market due to adverse selection.

Step-by-step explanation:

The statement that best explains why residual market insurance programs exist is to provide insurance coverage for high-risk individuals who cannot obtain it in the standard market. Due to adverse selection, insurance companies will often avoid selling insurance to high-risk individuals, as this would be financially disadvantageous for them. Residual market insurance is a solution to ensure that these individuals can still obtain insurance, even though they present a higher risk and might otherwise be unable to secure coverage.