Question

When a dental insurance company charges a premium above the average dental cost across a population, it loses money. When it keeps raising its premium, its losses mount. The dental insurance company is facing:

O the challenge of having private information not known by the buyers.
O sellers with diminishing market power.
O an adverse selection death spiral.
O the challenge of high growth of demand.

Answer 1

The dental insurance company is facing an adverse selection death spiral, where raising premiums to cover high-risk individuals leads to lower and medium-risk individuals not buying insurance, worsening the company's losses.

Step-by-step explanation:

The scenario described where a dental insurance company continually raises its premiums to cover losses and ends up losing more money is known as an adverse selection death spiral. In this situation, as premiums increase, people with lower or medium risks opt out of buying insurance, leaving only the high-risk individuals, which in turn increases the costs for the insurance company.

This cycle can lead to the company deciding not to sell insurance in the market. To address this, the company might either separate buyers into risk groups and charge accordingly or require those with low risks to purchase insurance at a price above their actuarially fair amount. Government regulations may influence these decisions, particularly in the U.S., where private firms predominantly provide health insurance. Balancing these costs and regulating premiums can involve other parties such as taxpayers or other insurance buyers.