Final answer:
The right of renewability in insurance policies guarantees insurability but not fixed premiums. For a balanced insurance model, various groups or factors may need to cover shortfalls if premiums don't match the expected payouts and operational costs. Actuarially fair premiums should account for expenses, risks, and profits, maintaining financial stability for the insurer.
Step-by-step explanation:
The right of renewability guarantees insurability pertains to insurance policies that allow the policyholder to renew the policy and to continue to be insured. However, this guarantee does not necessarily secure fixed premiums. In the context of insurance economics, if insurance premiums are set below the actuarially fair level for a particular group, other groups, such as other insurance buyers or taxpayers, may need to absorb the shortfall.
It is essential for an insurance company to manage its premiums to cover the claims, operational costs, and profits over time, taking into account investment income, administrative expenses, and varying risk groups.
If an insurance company tries to charge the actuarially fair premium to the entire group instead of individually to each risk group, it may lead to financial imbalance. The actuarially fair premium is one that is supposed to be set in a way that the total premiums collected are equivalent to the expected payouts for claims, plus the expenses and profit margin of the insurance firm.
Charging a uniform premium regardless of risk could cause low-risk individuals to seek insurance elsewhere, where their lower risk is reflected in lower premiums, while high-risk individuals would remain, leading to an increase in the average claim cost for the insurer.