Final answer:
Variable products are riskier due to the policyowner bearing the risk of investments and uncontrollable economic risks. There's a tradeoff between expected return and risk, which is evident in household investment choices like bank accounts, bonds, and stocks. Insurance operates on imperfect information, making it hard to predict and estimate individual risks precisely.
Step-by-step explanation:
Variable products are inherently riskier because the policyowner bears the risk of the choice of investment, and nonguaranteed economic risks over which an individual has very little control. Economic risks, such as natural disasters, wars, or massive unemployment, are occurrences that individuals have little influence over, yet they can significantly impact the ability to provide for oneself and one's family.
Household investment choices, such as bank accounts, bonds, and stocks, demonstrate a tradeoff between expected return and risk. While bank accounts typically offer low risk and low returns, stocks and bonds come with higher risks. Bonds, despite offering predetermined payments at a fixed rate of interest, carry the risk of the issuer defaulting, interest rate changes, and inflation, affecting their overall return and stability.
Insurance is based on imperfect information. Notably, future events are unpredictable and estimating specific individual risks is challenging due to a combination of inherent characteristics, choices, and luck. For example, an insurance company may struggle to assess the accident risk of a 20-year-old male driver from New York City accurately due to individual driving behaviors within the group.