Oklahoma Life Producer Practice Exam

How does Group Life insurance help mitigate the effects of adverse selection?

1. By covering individuals at a higher premium

2. By covering a small group of high-risk individuals

3. By covering a diverse group of people

4. By limiting the number of policies issued

The correct answer is: By covering a diverse group of people

Group Life insurance helps mitigate the effects of adverse selection by covering a diverse group of people. This diversity reduces the risk of insuring only high-risk individuals, who are more likely to seek insurance because they anticipate needing it. When insurance is provided to a broader population, it includes individuals with varying degrees of risk, from healthy to less healthy. This mix helps balance the overall risk within the group, making it easier for insurers to predict claims and set premiums accordingly. Adverse selection occurs when there is an imbalance in the risk pool, where those who are more likely to file a claim disproportionately seek insurance coverage. By including a larger, more varied group, Group Life insurance minimizes this imbalance and stabilizes the insurance pool, allowing for more accurate pricing and sustainable coverage for all members involved.