Final answer:
Annual premium payments typically result in the lowest overall cost for insurance policies, as more frequent payment plans tend to include additional service fees. High copays or higher premiums with lower copays cater to different customer risk profiles and usage patterns. Charging an actuarially fair premium to the group as a whole can lead to financial difficulties if high-risk individuals significantly surpass the average costs. Option A is the correct answer.
Step-by-step explanation:
The student's question regarding premium payment modes for insurance is related to understanding how different payment frequencies can affect the overall cost paid by the policyholder. Annual premium payments typically incur the lowest overall payment because insurance companies often add service fees to more frequent payment plans, such as semi-annual, quarterly, and monthly options. These additional charges can make the overall amount paid for insurance higher compared to a one-time annual payment.
An insurance company might offer policies with a high copay to individuals who prefer to pay lower monthly premiums but can afford to pay more when accessing services. Conversely, policies with a higher premium but lower copayments might be attractive to those who require frequent use of services and prefer to have more predictable costs. Deductibles and copayments are vital components of insurance structures because they serve to mitigate moral hazard by ensuring that policyholders have a personal financial stake in their insurance claims, discouraging overutilization of services.
Regarding the impact of charging an actuarially fair premium to the group as a whole, the insurance company may encounter financial challenges if high-risk individuals incur significantly more costs than the premiums collected. This would potentially undermine the insurer's ability to offer competitive rates and maintain profitability.