Final answer:
The term 'additional living expense' refers to increased living costs when an insured's residence is uninhabitable due to a covered loss. Insurance companies must balance premiums with claims and operating costs to be profitable. Raising premiums after high-risk losses could discourage low-risk individuals from buying insurance. A. additional living expense
Step-by-step explanation:
The term that describes the necessary increase in living expenses resulting from a loss by a covered peril incurred by the insured is additional living expense (A). This concept is particularly relevant in the context of property insurance, where a policyholder's residence might become uninhabitable due to a covered event, such as fire or severe weather damage. In such cases, the insurance policy may cover the cost of temporary housing and other increased living expenses while the policyholder's primary residence is being repaired or rebuilt.
Insurance companies operate on the principle that the average person's premiums must cover the collective claims of the insured, the company's operating costs, and allow for profits. Should the insurance company attempt to raise premiums to offset high-risk losses, it could deter individuals with lower risks from obtaining coverage, thereby affecting the insurer's risk pool and potential profitability.
Moreover, insurance payouts occur in various situations, including medical expenses, death of the policyholder, automobile damage, or home burglaries, highlighting the broad range of economic risks beyond an individual's control that insurance aims to mitigate.