Final answer:
Insurers typically separate insured individuals into risk groups and adjust premiums accordingly or avoid selling to high-risk individuals to prevent financial losses. Government regulations can further complicate this, sometimes leading to insurers withdrawing from markets entirely.
Step-by-step explanation:
When an insured is found to be a substandard risk, the insurance company is likely to take one of several actions to manage the situation. The insurer may choose not to sell insurance to those posing high risks, or they might separate buyers into risk groups and charge premiums accordingly. However, this practice can discourage low or medium risk individuals from purchasing insurance if premiums are raised across the board to cover high-risk losses. In some cases, state government regulations may require the insurer to sell policies at low premiums or to all applicants, resulting in insurers avoiding the high-risk market or withdrawing from the market entirely if the financial loss becomes unsustainable.