Final answer:
Insurance companies classify drivers into risk groups and set premiums accordingly. Good drivers receive discounts, paying premiums that represent the average damages they might cause, thus achieving actuarially fair insurance.
Step-by-step explanation:
When it comes to setting insurance premiums for drivers, insurance companies classify drivers into different risk groups. Those who qualify for a good driver discount are considered to belong to the safest risk group. These drivers are charged a premium that is at least equal to the average value of the damages they are expected to cause or the average amount they would collect in insurance payments.
For instance, if 60 of the safest drivers average $100 in damages per person, then their premium should be around $100 to be considered actuarially fair. If the intermediate and high-cost risk groups are paying significantly more, such as $1,000 and $15,000 respectively, the good driver discount policy ensures that safe drivers are not overpaying for their insurance coverage.
In a scenario where there are 100 drivers and the total necessary amount to cover the costs of accidents is $186,000 for a year, each driver would need to pay an insurance premium of $1,860 to meet this requirement. The distribution of this cost among different risk groups allows the insurance company to equitably balance premiums with expected losses.