Final answer:
An insurer can charge different amounts to insured individuals based on actuarially fair principles, reflecting each person’s risk level. High-risk individuals may face considerably higher premiums, while setting premiums below actuarial fairness would require compensation from other insurance buyers or taxpayers to balance out.
Step-by-step explanation:
It would be legal for an insurer to charge one insured more than another for the same coverage if the difference in charges is based on actuarially fair calculations. Actuarial fairness assesses the actual risk that each individual poses. For instance, health insurance might cost more for individuals with pre-existing conditions or for older adults due to higher expected healthcare costs. Similarly, young male drivers could be charged more for car insurance than young female drivers because of the statistically higher risk of accidents in that demographic. Charging actuarially fair premiums ensures that each group pays an amount corresponding to their risk, preventing situations where low-risk individuals subsidize the high-risk individuals excessively.
However, charging actuarially fair premiums to high-risk individuals could also lead to those individuals opting out of purchasing insurance due to prohibitively high costs. If an insurer were to charge premiums below the actuarially fair level, other groups such as other insurance buyers or taxpayers might have to cover the shortfall, as private companies cannot sustainably operate at a loss.