Final answer:
It is ethical for an insurer or insurance producer to make a fair profit to maintain sustainability and proper risk assessment. Charging actuarially fair premiums ensures that each group pays in accordance with their risk profiles, preventing imbalances that may require subsidies from other groups.
Step-by-step explanation:
An insurance company needs to balance the concept of an actuarially fair premium against the practical aspects of operating a profitable business. An actuarially fair premium is one that is equivalent to the expected value of an insured loss. When insurance is sold separately to each group, the fair premium is calculated based on the specific risk profile of each group.
If the insurance company were to charge the actuarially fair premium to the group as a whole, rather than to each group separately, it might lead to certain groups paying more than their fair share of premiums relative to their risk level, while others pay less. This imbalance can result in adverse selection, where higher-risk individuals are more likely to purchase insurance at a cost that does not accurately reflect their risk, leading to potential losses for the insurer.
Moreover, if insurance premiums are set below the actuarially fair level for a certain group, other groups such as taxpayers or other insurance buyers may have to subsidize this imbalance. Thus, it is ethical for an insurer or insurance producer to make a fair profit to maintain a sustainable business model and provide suitable levels of coverage without requiring subsidies from other parties.