Final answer:
The change of occupation provision permits an insurer to adjust both policy benefits and rates in response to a policyholder changing their occupation to one with a different level of risk.
Step-by-step explanation:
The change of occupation provision in an insurance policy allows the insurer to adjust both policy benefits and rates. This provision is critical for the insurer to manage risk effectively. If a policyholder switches to a profession with higher risks after obtaining insurance, the insurer may adjust the policy accordingly to reflect this increased risk. On the other hand, if the policyholder moves to a lower-risk occupation, they may be eligible for reduced premiums or improved benefits.
Insurance companies need to group clients to manage risk and prevent adverse selection. Otherwise, if everyone pays the actuarially fair premium for the group as a whole, those with lower risks would subsidize the high-risk individuals. This grouping allows insurance companies to charge premiums more accurately based on the risk level of each group.