Final answer:
The question pertains to contingent liabilities in business accounting and how insurance companies deal with imperfect information and risk estimation. Companies must take various actions based on the probability and estimability of a liability. In the context of insurance, charging a group-level premium can lead to adverse selection and potential losses.
Step-by-step explanation:
The scenarios presented in the question are related to contingent liabilities in accounting. An appropriate response would be that for scenario (a), where the liability is probable and can be estimated, the company should accrue the contingent liability. Scenario (b) suggests a potential liability that cannot be estimated, and therefore the company should disclose the contingency in the notes to their financial statements. For scenario (c), where the liability is considered remote and is not estimable, the company is not required to take any action.
When discussing how insurance works, it's emphasized that all insurance involves dealing with imperfect information. There is no way to predict future events with absolute certainty, which means that insurance companies must estimate the risk of adverse events occurring. This risk estimation is difficult due to the variability in individual behaviors and unpredictable events. If an insurance company tries to charge an actuarially fair premium based on the group as a whole rather than individually, it might end up with adverse selection where higher risk individuals buy the insurance and lower risk individuals opt out, leading to potential losses for the company.