Final answer:
Taking receipt of premiums and holding them for the insurance company is an example of an agency function, where the agent collects premiums on behalf of the company. This is separate from administrative tasks and claims processing. Mispricing premiums for groups can lead to financial instability for the company.
Step-by-step explanation:
Taking receipt of premiums and holding them for the insurance company is primarily an example of agency. In this context, agency refers to the fiduciary relationship whereby the agent (which could be a person or an entity) acts on behalf of the insurance company to accept premiums from policyholders. The role of the agent is a critical one in the insurance industry as they facilitate the transactions between the insurance company and the insured parties, ensuring the company can collect premiums efficiently.
The administrative costs, including hiring workers, administering accounts, and processing insurance claims, are significant for insurance companies and are different from the task of collecting premiums, which falls under agency. Insurance companies also derive income from investing the funds that they received in the past but did not pay out as claims. These investments are typically designed to be safe and liquid to ensure the company can meet its obligations in the event of major claims.
If an insurance company charges a group an actuarially fair premium as a whole rather than to each group separately, it risks mispricing the risk for different segments of the group, potentially leading to financial instability or loss.