Final answer:
A guaranteed renewable policy cannot be cancelled by the insurer but allows rate increases for a specified class. High copay plans are generally offered to those preferring lower premiums, while high-premium, low-copay plans to those expecting frequent care.
Addressing adverse selection requires accurate risk grouping, and government regulation plays a key role in stabilizing the health insurance market.
Step-by-step explanation:
The type of health insurance policy where the insurance company may not cancel the policy but has the ability to increase rates on a specified class of insureds is referred to as a guaranteed renewable policy.
Such policies ensure that coverage cannot be revoked as long as premium payments are made, but the cost of the premium may rise based on class-wide assessments, often reflecting changes in the risk profile or healthcare costs associated with that class.
Insurance companies typically offer policies with a high copay to customers who wish to pay lower monthly premiums and who are willing to pay more out-of-pocket for individual services. Conversely, a high-premium, low-copay policy is often attractive to those who anticipate needing regular medical care and prefer to have more predictable, reduced costs at the time of service.
Adverse selection and moral hazard are industry concerns that can lead to market distortions. One solution to adverse selection is for insurance companies to accurately sort buyers into risk groups and to price policies accordingly. Government involvement in the provision of health insurance can be instrumental in regulating these concerns, as seen globally.