Final answer:
The health insurance line usually has the largest number of exposure units, enabling the most accurate actuarial predictions for setting premiums. Charging a uniform premium to all risk groups can lead to adverse selection and financial instability for insurance companies.
Step-by-step explanation:
The segment of the insurance industry that contains the largest number of exposure units, allowing for more accurate actuarial calculations and predictions, is typically the health insurance line. Large exposure units provide a substantial amount of data, which enables actuaries to estimate risks and set premiums more accurately. By pooling large numbers of people together, actuaries can predict with some certainty the expected claims, which will then inform how much each individual should pay to not only cover the claims but also allow for the insurance company to cover operational costs and generate profits.
If an insurance company were to charge an actuarially fair premium to the group as a whole instead of charging each risk group separately, this might lead to adverse selection. Those in lower risk groups might opt out of the insurance, believing it to be unfair or too expensive, leaving a disproportionate number of high-risk individuals in the insured pool. This scenario would likely result in higher claims than anticipated, which could lead to financial losses for the insurer or increased premiums for the insured to cover the unexpected shortfall.