Why do insurers require a minimum number of employees to participate in a group insurance plan?

Insurers require a minimum number of employees to participate in a group insurance plan primarily to minimize adverse selection. Adverse selection occurs when those who are at greater risk of needing insurance are more likely to enroll in a plan, leading to higher costs for the insurer. By establishing a minimum number of participants, insurance companies aim to create a more balanced risk pool that includes both healthy individuals and those who may require more medical attention. This balance helps to stabilize premiums and ensures that the insurance plan is viable and sustainable over time.

Having a larger group mitigates the impact of high-cost claims from a few individuals, as the cost is spread across a wider base. This distribution of risk is critical for the insurance model, which relies on pooling the risk among all participants to keep costs manageable. Without a sufficient number of participants, the risk becomes concentrated, leading to potential financial instability for the insurer.

The other choices touch on aspects like policy benefits and underwriting costs, but the core reason revolves around addressing and minimizing the risk factors associated with adverse selection.