Final answer:
The California Insurance Code does not require an insurance policy to specify the insurer's stock market performance. Insurance premiums are the payments made for coverage, and an actuarially fair premium is one that equals the expected payouts. Charging one premium for all without accounting for varying risks can lead to adverse selection.
Step-by-step explanation:
The California Insurance Code requires that an insurance policy specify details such as the premium payment schedule, policy benefits and coverage limits, and the names of beneficiaries. However, the Code does not require an insurance policy to specify the insurer's stock market performance, as this information is not directly pertinent to the policyholder's rights and obligations under the insurance contract.
Understanding Insurance Premiums and Actuarially Fair Policies
An insurance premium is the amount paid by the policyholder to the insurance company in exchange for insurance coverage. In an ideal insurance system, not everyone will receive benefits equivalent to what they pay in premiums; instead, the average benefits paid should equal the average premiums collected. An actuarially fair insurance policy is one where the premium is set to equal the expected payouts; this is determined by considering the risk and expected cost of claims among the insured population.
If the insurance company were to sell life insurance separately to groups with differing family cancer histories, the actuarially fair premium for each group would reflect their respective risks. For the group as a whole, without discerning family cancer histories, the fair premium would average out the risks and likely be higher for those with lower risk, but lower for those with higher risk. If an insurance company tries to charge such a blended rate, it might attract more high-risk individuals than low-risk, leading to a situation known as adverse selection, where the insurance company may end up paying out more in claims than expected based on the premiums collected.