Final answer:
An underwriter assesses applicant information to determine the insurance premium, which depends on the risk level. An insurance system doesn’t guarantee equal benefits to premiums, as risk is pooled, and the average benefits usually equate to the premiums collected. The industry manages imperfect information through various measures.
Step-by-step explanation:
An underwriter's assessment of information on an insurance application is a critical process to gauge the risk associated with insuring an individual or entity. This involves analyzing the applicant's details to determine the probability of a claim being made, and as a result, influences the insurance premium that the individual will have to pay. Insurance premiums are the amount paid for coverage, reflecting the level of risk assessed by the underwriter. For instance, someone with a family history of illnesses may be charged a higher premium for life insurance. Regarding the distribution of benefits versus premiums in an insurance system, individuals should not expect to receive benefits equivalent to the premiums they paid. Instead, the concept of insurance is based on pooled risk, meaning that the average benefits paid out tend to equate to the average premiums collected, although individual experiences may differ. An actuarially fair insurance policy would be one where the premium equals the expected payout, but this is idealistic and does not account for administrative costs or profits. Problems like moral hazard, where insured parties may take greater risks because they are protected, can also arise within insurance markets. To manage imperfect information, mechanisms such as incentivizing safe behavior, requiring disclosures, and using statistical models to set premiums are employed.