Final answer:
Group insurance contracts typically include provisions like coverage dates and amounts, beneficiaries, and more. Issues arise for insurers when charging a group as a whole an actuarially fair premium without individual risk assessments, leading to the potential for adverse selection and financial instability.
Step-by-step explanation:
Most group contracts in insurance often include certain major provisions such as coverage amounts, effective dates of coverage, beneficiaries, settlement options, conversion privilege, and a 31-day continuation coverage. If an insurance company were to charge the actuarially fair premium to a group as a whole, it might face the issue of adverse selection, where individuals with a higher risk of claiming are more likely to take insurance, while those with a lower risk opt out if they feel the premium is too high for the risk they represent. This situation could render the insurance company unprofitable, as high-risk claims would increase without enough low-risk members to balance out the costs.
When determining actuarially fair premiums for groups with varying risks, such as those with differing family cancer histories, the premiums would vary significantly if assessed individually. If the insurance company cannot differentiate between the groups due to lack of information (such as family cancer histories), it must charge a premium that reflects the average risk, which may be unfair to those with lower risk and result in a loss of low-risk customers, potentially threatening the company's financial stability.