Final answer:
The insurance company's act of increasing premiums despite assurances could be seen as a breach of contract. This highlights the challenge of setting sustainable insurance premiums that reflect actual risk without excluding high-risk individuals from obtaining coverage.
Step-by-step explanation:
The act of an insurance company raising premium costs for all its policyholders by 10% over the next 2 years - even after assuring new policyholders that their premium would not increase for at least 5 years - could be termed as a breach of contract or, more informally, as going back on their promise.
This situation underscores a fundamental issue in insurance pricing: If insurance premiums are set below the actuarially fair level for a certain group, they are unsustainable in the long run, as they don't accurately reflect the risk involved. Consequently, other groups such as taxpayers or other insurance buyers may have to compensate for the deficit created when an insurance company underprices its policies.
Setting premiums at actuarially fair levels means that those in higher risk groups might end up paying significantly more, which could discourage them from purchasing insurance altogether. Thus, the dilemma faced by insurance companies is balancing the affordability of premiums with the need to reflect the true cost of coverage.