Final answer:
Insurance companies are classified based on how they conduct business, which includes assessing and categorizing risk to address adverse selection and moral hazard in the market. They may separate buyers into risk groups, which can be controversial, and are influenced by government laws like The Affordable Care Act. option c.
Step-by-step explanation:
Insurance companies are classified in terms of how they're conducting business. This involves assessing risks and determining who to sell insurance to based on the potential for claims. In order to address the issue of adverse selection, where individuals with a higher likelihood of filing a claim are more inclined to buy insurance, companies may separate insurance buyers into risk groups and alter their pricing strategy accordingly. For instance, in the U.S. health insurance market, to mitigate the risk of adverse selection, coverage is often provided through groups based on place of employment or through state government sponsored health exchange markets as seen with The Affordable Care Act.
Classifying individuals into these groups can lead to controversies, especially in ambiguous cases such as whether a driver who has had a major accident should be considered high-risk or just unlucky. These classifications are an attempt to deal with moral hazard and adverse selection, which are major problems arising due to imperfect information in insurance markets. Government laws and regulations, such as the requirement to purchase insurance, also play an influential role in how insurance industries navigate these issues.