Final answer:
The clinical approach relies on expert judgment, while the actuarial approach uses statistical data to predict outcomes. Risk groups involve similar risk profiles for events like disease or accidents. Actuarial fairness in insurance means premiums are set to reflect each group's risk proportionately, covering expected claims and costs over time.
Step-by-step explanation:
The concepts of clinical versus actuarial approach generally relate to the methodology used in evaluating and predicting outcomes in various fields, including insurance, medicine, and psychology. In a clinical approach, decisions are made based on expert judgment and intuition, often drawing from personal experience. On the other hand, the actuarial approach relies on statistical models and data to predict outcomes. For insurance companies, the actuarial approach uses historical data to determine the likelihood of an event occurring and to set premiums.
Risk groups are central to actuarial science and insurance. A risk group is a collection of individuals who share a similar likelihood of an adverse event occurring, such as developing a certain disease or being involved in a car accident. These groups are identified based on various risk factors such as genetics, lifestyle habits, and geographical location. In the context of insurance, actuarial fairness refers to setting premiums that proportionately reflect each risk group's likelihood to claim insurance.
To calculate an actuarially fair premium, the insurance company assesses the group's risk and sets premiums so that, over time, the total amount collected covers the expected payouts for claims, the costs of running the company, and allows for firm profits. For example, among 50-year-old men, those with a family history of cancer (20% of 1000 men) have a 1 in 50 chance of dying within a year, while those without a family history (80% of 1000 men) have a 1 in 200 chance of dying within the same period. Premiums are set higher for the higher-risk group to keep the insurance system financially sound.
When it comes to charging a single premium to the entire group without knowledge of each individual's cancer history, the premium is averaged out. However, if a firm sets premiums based on the average risk for a mixed group instead of distinguishing between high and low-risk individuals, they may lose higher-risk customers to companies offering lower rates, or they may attract too many high-risk customers, which would not be financially sustainable.