Final answer:
Insurance premiums are indeed based on past loss experiences, which is true. Premiums are designed to cover claims, operational costs, and profit margins while considering the varying risks of different groups.
Step-by-step explanation:
The statement that insurance premiums are based first and foremost on the past experience of losses is true. Insurance companies calculate premiums based on the historical loss experience, which allows them to estimate the risk and likelihood of future claims. Additionally, these premiums must cover the costs associated with the average person's claims, the operational costs of running the insurance company, and provide room for the company's profits. This practice ensures the sustainability of the insurance business model.
When considering how insurance companies determine premiums, it's important to factor in the concept of risk groups and actuarial fairness. Different people have different levels of risk due to various factors, such as genetics, personal habits, and environmental conditions. Consequently, a premium that is actuarially fair to the whole group rather than each subgroup might result in losses for the company if higher-risk individuals are not charged enough to cover the potential claims they generate.
In situations where state insurance regulations attempt to enforce low premiums, insurance companies often react by avoiding higher-risk customers or choosing to withdraw from markets entirely to maintain profitability in line with the fundamental law of insurance. Examples include insurance companies withdrawing business from New Jersey and Florida due to state attempts to keep insurance premiums artificially low.