Final answer:
An insurer has the right to collect accurate and relevant information to perform their duties fairly and effectively, which helps set actuarially fair premiums and manage the risks associated with moral hazard.
Step-by-step explanation:
An insurer must be fair in the underwriting process and is obligated to pay all covered losses. To ensure the faithful execution of these duties, the insurer has the right to collect accurate and relevant information. This allows the insurer to assess risks effectively and set premiums that are actuarially fair, meaning the premiums should reflect the average amount of benefits for the person in that risk group. Charging an actuarially fair premium to the group as a whole rather than to each group separately could lead to a situation where certain individuals or groups would pay more than their expected losses, while others would pay less. This could result in a loss of business from low-risk individuals or attract high-risk individuals, which would disrupt the balance of the insurance pool and potentially lead to financial instability for the insurance company. Therefore, maintaining accurate information is crucial for the sustainability of insurance offerings.
The issue of moral hazard also highlights the importance of information in insurance as insured individuals with less incentive to avoid risk might increase their risk behavior, leading to higher than expected losses for the insurer. Hence, collecting relevant information helps insurers manage risks associated with underwriting and moral hazard.