Final answer:
IRCA involves evaluation of risk factors such as driving history, vehicle types, and payment options to determine insurance rates, which strive to be actuarially fair despite challenges like moral hazard and adverse selection.
Step-by-step explanation:
The discussion of Individually Rated Commercial Auto Risk (IRCA) involves understanding the various components that influence the insurance rates for commercial vehicles. This includes A. Underwriting Criteria, which may involve evaluating the driving history, age of the drivers, and the vehicle's safety rating. The B. Policy Limits dictate the maximum amount that the insurance company will pay in the event of an accident. C. Vehicle Types have different risk profiles and thus can affect your premium differently. Lastly, D. Premium Payment Options include paying monthly, quarterly, or biannually, all of which are additional expenses regardless of whether the vehicle is fully paid off.
Insurance companies use risk classification to charge premiums that are "actuarially fair", meaning that the premium equals the expected losses within that group. However, this system is not without its challenges, as issues of moral hazard and adverse selection arise due to imperfect information about individual risks.