Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Health InsuranceMedium
A Florida employer with 40 employees is offering group health insurance. The insurer requires at least 75% of eligible employees to participate in the plan for it to be implemented. This requirement is in place to prevent which of the following?
- AAdverse selection
- BInsurable interest
- CSubrogation
- DMoral hazard
Show answer & explanationAnswer & explanation
Correct answer: A. Adverse selection
Participation requirements, like the 75% rule in group health insurance, are designed to prevent adverse selection. This occurs when only individuals with a higher-than-average risk (e.g., those who expect to use more healthcare) choose to enroll in a plan, leading to higher costs for the insurer.
Why the other options are wrong
- B. Insurable interest means a person would suffer a financial loss if an insured event occurs, which is a general principle, not specifically addressed by participation rates.
- C. Subrogation is the insurer's right to recover payments from a third party responsible for a loss, unrelated to participation rates.
- D. Moral hazard refers to increased risk-taking behavior due to insurance coverage, not the initial enrollment decision.
Adverse Selection (Group Health)
The tendency for individuals with a higher probability of loss (e.g., those in poorer health) to seek and continue insurance more often than those with a lower probability of loss. Group health participation rules aim to counteract this.
- Higher risk individuals disproportionately enroll
- Leads to higher claims and increased premiums for everyone
- Participation requirements (e.g., 75% rule) mitigate adverse selection
Memory trick: High participation avoids high risk.