Final answer:
Berryhill Insurance decided to avoid the risk of paying flood claims in the southern states to prevent financial losses and adverse selection, which could lead to higher premiums and discourage lower-risk individuals from buying insurance. Option c is correct.
Step-by-step explanation:
As a result of an internal risk assessment, Berryhill Insurance chose to avoid the risk of paying flood claims in the southern states. By not selling flood insurance in these high-risk areas, the company eliminates the chance of incurring losses from potential claims. This decision is driven by an assessment of adverse selection, where insuring high-risk individuals would lead to significant financial loss and potentially higher premiums for those with lower risks, further discouraging them from maintaining their policies.
When it becomes unprofitable to provide insurance due to excessive risk, an insurance company may opt to avoid that market entirely. This can be seen as a strategic move to maintain financial stability and prevent the cycle of adverse selection, where excessive risk leads to higher premiums and a reduction in the pool of insureds to those most likely to file a claim.