Final answer:
The statement that premium is the fixed amount paid by the insured to the insurance company on a regular basis is true. Insurance serves to protect households and firms financially by collecting premiums used to cover the insured in case of adverse events. Regulators' insistence on low premiums may result in companies withdrawing from markets to avoid losses.
Step-by-step explanation:
The statement that premium is the fixed amount of money paid by the insured to the insurance company regularly is true. Insurance operates as a financial safety net for households and businesses, where they pay regular payments known as premiums to the insurance company. The insurance company calculates the cost of these premiums based on the likelihood of certain events happening within a group of people. If members of this group encounter a covered adverse event, they receive compensation from the collected premiums.
Should state regulators set artificially low premiums, insurance companies might choose to avoid insuring high-risk individuals to prevent financial losses. Over time, the fundamental principle that the average payout cannot exceed the average amount collected through premiums will apply. Companies confronted with strict regulations and low pricing may opt out of providing services in those areas, as seen in the late 1990s in New Jersey and with State Farm's withdrawal from selling property insurance in Florida in 2009.
If an insurance company tries to charge the actuarially fair premium to the entire group instead of to individual risk groups, it may result in financial instability for the company. This occurs because the homogeneous premium does not reflect the varied risk levels among the insured, potentially leading to inadequate funds for high-cost claims.