Final answer:
A foreign insurance company doing business in Texas must adhere to Texas insurance laws. Government mandates for purchasing insurance help alleviate adverse selection concerns, allowing insurers to price policies based on market averages. Although mandated insurance purchases benefit both insurers and consumers, insurers may still attempt to avoid high-risk clients if not legally obliged to provide coverage.
Step-by-step explanation:
A foreign insurance company conducting insurance business in Texas is indeed subject to Texas insurance laws. When dealing with adverse selection, an insurance company needs to differentiate between high and low-risk groups and adjust pricing accordingly. This practice ensures that the insurance market can exist and function properly. Government laws can mandate the purchase of certain insurance, like auto or homeowner's, to address adverse selection issues.
Governments often intervene in the insurance marketplace to require the purchase of specific insurance types, an action that helps to negate the fear of adverse selection for insurance firms. By setting market-average prices due to these requirements, insurance companies are able to provide coverage without selectively excluding high-risk individuals, although they may still try to avoid selling to high-risks when the laws allow it.