Final answer:
ABC Insurance Company has waived one of its legal rights by accepting a life insurance application with unanswered questions. This relates to the concept of adverse selection, where insurers face challenges due to asymmetric information. The focus is on how companies manage these risks and determine actuarially fair premiums.
Step-by-step explanation:
When ABC Insurance Company accepts a life insurance application with unanswered questions and makes it part of the life contract, it has effectively waived one of its legal rights. In doing so, the company has chosen not to enforce a provision that could be critical to the underwriting process, which typically involves evaluating the risk associated with an insurance applicant to determine the appropriate premium. This situation relates to the concepts of adverse selection and actuarially fair premium, which are vital in the insurance industry. Adverse selection occurs when there is asymmetric information between the insurer and the insured. For example, someone aware of their potential high risk due to family health history may opt for more insurance than the company would sell if it had this information, leading to higher than expected claims. To counteract this, insurers attempt to separate buyers into risk groups and charge accordingly.
An actuarially fair premium is one where the price reflects the true risk of insuring a person based on their risk group. However, when companies must insure a whole group without detailed individual information, they must calculate a fair premium for the group as a whole, which may be higher for low-risk individuals but averages out the risk.