Final answer:
Insurance principles dictate that premiums must cover claims, operational costs, and profit. Also, insurance is a risk-sharing mechanism affected by moral hazard where risk groups determine premiums.
Step-by-step explanation:
The four fundamental principles of insurance include the concept of premiums being paid by members of a group to cover potential risks, with those experiencing the insured event receiving compensation. Additionally, this model must maintain that premiums collected over time can't be less than the payouts, known as an actuarially fair arrangement. Furthermore, the element of moral hazard emerges when those insured may act less cautiously knowing they are covered. The fundamental law of insurance also insists that the average individual's payments into the insurance should cover their claims, operational costs of the insurance company, and allow for the company's profits. Different risk groups are recognized, where individuals might have different likelihoods of a claim based on various factors including genetics, personal habits, or geographical location. As such, insurance relies on balancing these factors to remain fair and profitable.