Final answer:
An example of a merit ratemaking method is c) Offering discounts to drivers with good records. This reflects the principle of adjusting premium rates based on individual risk and aims to be actuarially fair by aligning premiums with expected losses for a risk group, while also navigating around issues of moral hazard and adverse selection.
Step-by-step explanation:
An example of a merit ratemaking method is c) Offering discounts to drivers with good records. This approach aligns with the principle of charging premiums based on the individual risk level of policyholders. Insurance companies use historical data to determine the likelihood of a driver filing a claim and adjust their premium rates accordingly. For instance, drivers with a history of accidents may be deemed high-risk and charged higher premiums, while those with clean driving records may receive discounts, reflecting their lower risk. This method is designed to be actuarially fair, meaning that the premium reflects the expected losses for that risk group.
In contrast, options a) Assigning a higher premium to high-risk drivers and d) Charging the same premium to all policyholders do not fit within the framework of merit ratemaking since they either don't adjust for individual merit or treat all policyholders equally, respectively. Option b) Setting the same premium for all drivers regardless of risk suggests a lack of differentiation based on individual risk, which is contrary to the principles of merit rating.
Merit ratemaking takes into consideration the potential problems of moral hazard and adverse selection, which arise when the insured parties and insurers have different information, with the former having the incentive to minimize their perceived risk to obtain lower premiums. Actuarial fairness ensures that those within a risk group pay premiums commensurate with the expected level of claims within that group.