Final answer:
The correct answer is 'C. Lapse,' which refers to the termination of an insurance policy due to non-payment of premiums, potentially leading to a market imbalance caused by adverse selection.
Step-by-step explanation:
The term you're looking for is C. Lapse. When a policyholder fails to pay the premium on their insurance policy, the policy may indeed lapse, which means the coverage provided by the policy is terminated. This can be a significant issue for the insurance company and the insured. If the insurance company has to increase premiums to compensate for losses mainly due to high-risk individuals, it could result in people with lower risk profiles becoming less inclined to purchase insurance. This is known in the industry as the issue of adverse selection, and it can lead to a destabilization of the market. Therefore, insurers often have strict policies in place to prevent policy lapses by sending reminders and offering grace periods to encourage the payment of premiums.