Final answer:
A life insurance agent seeking to replace a client's policy with a new one must consider the risks of adverse selection and the need for an actuarially fair premium for all policyholders. It's crucial to determine whether the new policy offers more benefits, considering the client's unique risk factors and the terms of the insurance policies.
Step-by-step explanation:
The scenario where a life insurance agent wants to replace his client's current life insurance policy with a new one from another insurance company involves several considerations, including the assessment of risk, actuarial fairness, and potential regulatory implications. An insurer who offers life insurance must account for the possibility of adverse selection, which occurs when individuals with a higher-than-average risk of filing a claim are more likely to purchase insurance. This is particularly relevant if the individual knows more about their family health history than the insurer could uncover without a costly investigation.
To manage this, insurance companies might separate buyers into risk groups and adjust premiums accordingly. However, if this information about risk factors like family health history isn't available, insurers must decide on a fair premium for the entire group, usually resulting in higher costs for those deemed lower risk. Regulations may also dictate requirements for purchasing insurance, ensuring that market participation is sufficient to sustain the insurance pool.
Considering this, the life insurance agent must carefully assess whether the new policy is more beneficial for the client, taking into account the client's personal risk factors and the terms of both the current and proposed policies. Making an informed decision helps both the client and the insurance company avoid the complications associated with adverse selection.