Final answer:
The legality of a contract between an insurer and a prospective insured depends on adhering to principles of risk assessment, actuarial fairness, and compliance with government regulations.
Step-by-step explanation:
A contract between an insurer and a prospective insured would be legal under certain conditions. To navigate challenges such as adverse selection and moral hazard, insurance companies may utilize strategies to identify and categorize individuals into risk groups and adjust premiums accordingly. For the insurance market to be sustainable, it often means that the insurer must either avoid providing policies to high-risk individuals or require low-risk individuals to purchase insurance at a possibly higher rate.
Furthermore, the premiums paid by an individual should be actuarially fair, meaning they are reflective of the average amount of benefits for that person's risk group. Government laws and regulations also play a crucial role in ensuring the legality and fairness of these contracts, sometimes even mandating insurance coverage for certain groups to enhance the market and protect consumers from risk.