Final answer:
The premium requirements for an accident and health insurance policy are detailed in the consideration clause. This clause specifies the payment schedules and amounts. Insurance should balance premiums with expected benefits, considering moral hazard and adverse selection risks.
Step-by-step explanation:
An accident and health insurance policy's premium requirements are detailed in the consideration clause of the policy, which is option (a). This clause outlines the premium payment schedules, the amount to be paid, and the frequency of payments, which altogether constitute the consideration given by the insured to the insurer in exchange for the coverage provided.
Insurance operates on the principle of sharing risk among a group, where the average amount paid in premiums over time by the group members cannot be less than what they receive on average as benefits. In an actuarially fair insurance policy, the premiums paid are equivalent to the expected benefits for someone within that risk group. However, the concept of moral hazard highlights a potential issue in insurance markets since insured individuals may be less inclined to prevent the risk they are insured against, knowing they have coverage.
When an insurance company charges a uniform actuarially fair premium to an entire group rather than differentiating based on individual risks, such as family medical history for life insurance, it can lead to cross-subsidization and potential market imbalance. If a single actuarially fair premium is applied without accounting for individual risk levels, healthier members may opt out, feeling the premium is too high for their risk, whereas less healthy individuals would find the premium attractive. This unbalance can lead to adverse selection, where the insurer ends up with a disproportionate number of high-risk individuals, increasing the likelihood of paying out benefits and potentially threatening the financial stability of the insurance pool.