Final answer:
An insurance premium is the amount of money that an individual pays to an insurance company in exchange for coverage. It is not expected that each person will receive benefits equal to what they pay in premiums, as insurance works on the principle of pooling risks and spreading costs. An actuarially fair insurance policy is one where the premium charged reflects the expected value of future claims based on actuarial calculations.
Step-by-step explanation:
An insurance premium is the amount of money that an individual pays to an insurance company in exchange for insurance coverage. It is usually paid on a regular basis, such as monthly or annually. The premium amount is determined based on various factors, including the type of insurance policy, the age and health of the individual, and the level of coverage requested.
Within an insurance system, it is not expected that each person will receive benefits equal to what they pay in premiums. Insurance works on the principle of pooling risks and spreading the costs among a large number of individuals. While some individuals may never need to file a claim and may appear to not receive direct benefits, the average benefits paid will typically equal the average premiums paid over a large population.
An actuarially fair insurance policy is one where the premium charged is equal to the expected value of future claims based on actuarial calculations. In other words, it is a premium that reflects the risk associated with the insured event happening and the potential costs of that event. This ensures that the insurance company can cover its expenses and make a reasonable profit.