California Life and Health Insurance Practice Exam

What is the purpose of minimum participation standards in group health insurance plans?

1. Increase premium rates

2. Prevent adverse selection

3. Enhance benefits

4. Attract more customers

The correct answer is: Prevent adverse selection

Minimum participation standards in group health insurance plans serve primarily to prevent adverse selection. Adverse selection occurs when individuals who are at higher risk of needing health care are more likely to enroll in insurance plans, while healthier individuals may opt out. By setting a minimum participation requirement, insurance companies can ensure that a sufficient number of healthy individuals join the plan along with those who may have higher health risks. This diverse enrollment helps spread the risk across a larger pool, stabilizing premiums and maintaining the financial viability of the insurance plan. The other options relate to aspects of insurance but do not align with the primary function of minimum participation standards. While increasing premium rates, enhancing benefits, or attracting more customers might be goals for insurers, they are not the purpose of establishing minimum participation requirements. Instead, those standards directly address the issue of risk management and the sustainability of the group health insurance model.