Answer:
The correct term for a policy that cannot be canceled or have its premiums increased by the insurer is 'noncancellable.' Charging an actuarially fair premium to a group as a whole can lead to adverse selection where healthier individuals seek insurance elsewhere, leaving the company with higher risk individuals and potential financial losses. The correct option is b).
Step-by-step explanation:
The type of policy where the insurer is not permitted to cancel or increase the premium is referred to as noncancellable. This term means that the policyholder has the assurance that the premium rates will not change, and the policy cannot be canceled as long as they continue to pay the premiums. On the other hand, a guaranteed renewable policy can usually be renewed without changes, but there might be a scenario where the premium could be increased for an entire class of policyholders.
Regarding the question on premiums, if an insurance company tries to charge the actuarially fair premium to the group as a whole rather than to each group separately, this could lead to adverse selection. Adverse selection happens when there is asymmetric information between buyers and sellers. In this case, healthier individuals or lower risk members of the group may opt out and seek insurance elsewhere at lower rates, since their individual risk is not accurately reflected in the group premium.
Consequently, the insurer would be left insuring a pool with higher average risk, potentially leading to greater claims than expected and financial losses. Therefore, insurers often adjust premiums based on individual risk factors to avoid this scenario. The correct option is b).