Question

The face amount of the substitute insured rider remains the same for a new employee. The premium however, will be refigured. ______ and ________ are both required in order for the premium to be refigured for the new employee.

Answer 1

If an insurance company tries to charge the actuarially fair premium to the group as a whole instead of each group separately, it can result in adverse selection and inaccurate premium calculations for different groups.

Step-by-step explanation:

When an insurance company tries to charge the actuarially fair premium to the group as a whole instead of each group separately, it can have significant implications for the company.

Firstly, charging the actuarially fair premium to the group as a whole can lead to adverse selection. Adverse selection occurs when individuals with a higher risk of making a claim are more likely to purchase insurance. If the premium is not refigured for each group separately, the insurance company may end up with a higher number of high-risk individuals in the group, which can increase the overall cost of insurance and potentially lead to financial losses for the company.

Secondly, charging the actuarially fair premium to the group as a whole may not accurately reflect the risk profile of each individual group. Each group may have different characteristics and risk factors that should be taken into account when determining the premium. Failing to refigure the premium for each group separately can result in overcharging or undercharging certain groups, which can create dissatisfaction among customers and potentially lead to loss of business.

Overall, it is important for insurance companies to properly refigure the premium for each group separately to ensure fairness, accurately reflect risk profiles, and mitigate adverse selection.