Final answer:
An insurance premium is a payment to an insurance company calculated based on event probabilities within an insured group. The concept of an actuarially fair policy implies premiums equivalent to expected payouts. Moral hazard refers to a change in the insured's behavior due to the security insurance provides.
Step-by-step explanation:
An insurance premium is a regular payment made by households or firms to an insurance company to protect against significant financial losses from specific events. The premium is calculated by the insurance company based on the probability of events occurring within a group of insured individuals. Not every person can expect to receive benefits equal to what they pay in premiums; rather, the average benefits paid out is intended to match the average premiums collected.
An actuarially fair insurance policy is one where the premiums are set to equal the expected payouts for the covered events. The issue of moral hazard arises when having insurance influences the behavior of the insured, potentially leading to an increase in the occurrence of the insured event.