Final answer:
The three significant causes of insolvency in insurance companies are the high costs associated with medical problems, the adverse selection effect in insurance markets, and the inability to balance the costs of claims, operations, and profits.
Step-by-step explanation:
The three causes of insolvency that account for more than half of all insolvencies of insurance companies include medical problems as a factor, as indicated by 46% of bankruptcies; adverse selection in insurance markets, where riskier individuals are more likely to buy insurance, making it expensive; and the inability to cover the costs of average person's claims, the costs of running the company, and still having room for the firm's profits.
One significant cause of insolvency is when the costs of medical problems lead to an overwhelming number of high claims that insurance companies cannot cover. The concept of adverse selection causes an imbalance in the risk pool of insured individuals, often resulting in higher premiums and potential losses for insurers. Finally, a fundamental law of insurance requires that incoming premiums must adequately cover the average person's claims, administrative and operational costs, and allow for company profits. Failure to achieve this balance can lead to insolvency.