What is one primary reason why insurers limit the number of participants in a group insurance plan?

Insurers often limit the number of participants in a group insurance plan primarily to minimize adverse selection. Adverse selection occurs when there is a disproportionate number of high-risk individuals in a group compared to low-risk individuals. When insurers have a higher concentration of participants who are more likely to make claims, it can lead to increased costs that are unsustainable over time.

By limiting the number of participants, insurers can better manage the risk pool and ensure that it includes a more balanced mix of low-risk and high-risk individuals. This balance helps maintain stable premiums and reduces the likelihood of significant financial loss for the insurer. Additionally, with a controlled group size, insurers can more accurately predict claims and thereby set premium rates that reflect the actual risk involved. This strategic approach contributes to the overall sustainability and effectiveness of group insurance plans.