Massachusetts Life Producer Practice Exam

Why do insurance companies require a minimum participation in group insurance plans?

1. To increase premiums

2. To promote healthier lifestyles

3. To minimize adverse selection

4. To ensure profit margins

The correct answer is: To minimize adverse selection

Insurance companies require a minimum participation in group insurance plans primarily to minimize adverse selection. Adverse selection occurs when there is an imbalance in the risk pool, often driven by individuals with higher risk opting into insurance at higher rates than those with lower risk. By setting a minimum participation requirement, insurers can ensure a more diverse group is represented in the plan. This diversity is crucial because it brings together both healthier and higher-risk individuals, balancing the overall risk for the insurer. If a group has too few participants, particularly if those participants are primarily higher-risk individuals, the insurance company may end up paying out more in claims than it collects in premiums. A larger participation threshold allows for a more stable and predictable risk pool, ultimately leading to better financial sustainability for the insurance provider and more stable premiums for policyholders. Additionally, by attracting a sufficient number of participants, insurance companies can strengthen the collective bargaining power when negotiating premiums and benefits, further ensuring their financial viability.