Final answer:
Carriers' liability refers to the insurance concept where freight carriers are responsible for compensating for any loss or damage to goods they transport. It is part of the broader fundamental law of insurance which seeks actuarial fairness among various risk groups. If a uniform actuarially fair premium is charged to all, it can cause financial instability for an insurer due to adverse selection.
Step-by-step explanation:
The question refers to the concept of carriers' liability, which is a term used in the context of insurance, particularly in the transportation and logistics industry. Carriers' liability is the legal responsibility that freight carriers have for the goods they transport. This liability ensures that in the case of loss or damage to the goods while in transit, the carrier is responsible for compensating the cargo owner.
This system follows a fundamental law of insurance which dictates that the payments made by the insured, over time, should be sufficient to cover the claims and compensate for the risks that the insured individuals or groups are exposed to, as well as the administrative costs of running the insurance company and allowing for the company's profits. When considering the aspect of risk groups, it's crucial to understand that not everyone possesses the same level of risk. Actuarial fairness means that insurance premiums should be proportional to the level of risk posed by an individual or a group.
If an insurance company charges a flat, actuarially fair premium to all individuals regardless of the risk group they belong to, it may lead to an imbalance where lower-risk individuals are paying more than necessary while higher-risk individuals are paying less. This can lead to adverse selection problems, causing lower-risk individuals to leave the insurance pool, which over time can lead to the insurer's financial instability.
In addition, the term coinsurance is mentioned, which is a concept where the insurance policyholder pays a certain percentage of a loss, and the insurance company pays the remaining cost. This mechanism is used often in health insurance policies and helps to distribute the risk between the insurer and the insured.