Question

Which of the following statements is true, concerning the alteration of optional policy provisions?

a.An insurer may change the wording of optional provisions, as long as the change does not adversely affect the policyholder.
b.an insurance company has the flexibility to modify the language of optional policy provisions without causing harm to the policyholder.
c.it’s important to ensure that any alterations do not negatively impact the coverage or benefits provided by the policy.
d.The goal is to strike a balance between adaptability and maintaining the policyholder’s rights and interests.

Answer 1

When an insurance company charges the actuarially fair premium to the group as whole, it can lead to adverse selection and potential losses for the company. To sustain the insurance market, companies need to accurately categorize risk groups and abide by government regulations.

Step-by-step explanation:

When an insurance company tries to charge the actuarially fair premium to a group as a whole, instead of charging each group separately, it can lead to adverse selection. Adverse selection refers to the situation where higher-risk individuals are more likely to purchase insurance compared to lower-risk individuals. This can result in the insurance company facing higher costs and potential losses, as they may have to pay out more claims than anticipated.

In response to this, the insurance company may decide not to sell insurance in that particular market. To sustain an insurance market, the company must find a way to accurately categorize and charge different risk groups. The insurance industry also faces government laws and regulations that influence its operations and requirements.