Final answer:
The correct answer is option c. Errors and omissions most commonly occur during claims processing, due to the complex nature of policy interpretation. If an insurer charges an actuarially fair premium to the entire group rather than individually, it could cause financial imbalance due to subsidization and adverse selection.
Step-by-step explanation:
The most common time for errors and omissions to occur on the part of an insurer is during claims processing. This stage involves interpreting the policy language and assessing the claim details which can be complex, leading to potential mistakes. The question also touches upon the concept of charging an actuarially fair premium.
If an insurance company charges the actuarially fair premium to the group as a whole instead of to each group separately, it may result in certain members subsidizing others. More specifically, lower-risk individuals may end up paying higher premiums than necessary to offset the higher risk of others, which could lead to adverse selection and potential financial imbalance for the insurer.