Final answer:
An insurer can use historical insurance claims, current market value, and building inspection reports when considering the insurability of a commercial property for renewal. Using a group-wide actuarially fair premium may result in adverse selection, with high-risk insureds paying less than their fair share and low-risk insureds paying more. The correct option is d) All of the above.
Step-by-step explanation:
When considering the insurability of a property for renewal of a commercial package policy, an insurer can utilize a variety of information. The options include: a) historical insurance claims, which help the insurer understand the frequency and severity of past claims on the property, thus indicating potential future risks.
b) The current market value of the property, which can influence the cost to replace or repair the property in case of a loss. Lastly, c) Building inspection reports provide current information on the condition of the property, which can affect the risk assessment. Therefore, the correct answer to what an insurer can use when considering the insurability of the property for renewal is d) All of the above.
If an insurance company tries to charge the actuarially fair premium to the group as a whole rather than to each group separately, it may result in pricing that doesn't accurately reflect the risk of individual subgroups within the insured population. High-risk individuals or properties would be paying less than their fair share, while low-risk individuals or properties would be paying more. This can lead to adverse selection, where high-risk individuals are more likely to purchase insurance at a favorable rate, potentially leading to unsustainable losses for the insurer.