Final answer:
The insurance payments in December could be zero because of prepaid insurance expenses, indicating the payment for December was previously made. Insurance companies leverage risk pooling from premiums paid by consumers, like drivers, to cover accident-related costs. Risk grouping allows insurance companies to set premiums fairly, based on the risk level of each policyholder.
Step-by-step explanation:
The question relates to accounting practices for insurance expenses in the context of a company's financial statements. If an insurance expense of $2,000 expired in December without any payments made during that month, it can indicate a prepaid expense situation. In other words, the insurance was likely paid in advance for a period that includes December, and while December is now being expensed, no additional payment is required during that month because the payment was made previously. This is common accounting practice as companies often pay insurance premiums upfront covering a specific term which can extend beyond a single month.
Furthermore, insurance companies operate by collecting premiums from their policyholders, such as drivers, to create a pool of funds that cover accident costs. If each of 100 drivers pays a $1,860 premium annually, the insurance company accumulates $186,000. This amount funds the expenses arising from accidents across the risk pool, which includes drivers with different risk profiles. The concept being illustrated is how risk pooling in insurance allows companies to charge premiums based on risk classification and covers accident costs predictively.
Lastly, drivers who incur low damages effectively subsidize those with higher damages if all pay the same premium. Thus, risk groups are important in determining fair premiums and ensuring that individuals are charged based on the risk they represent.