Final answer:
Insurance companies price their policies based on claim probability and size to ensure coverage for claims, company costs, and profits. Actuarially fair premiums reflect individual risks, causing higher charges for high-risk groups. Large-client bases also allow companies to negotiate better service rates.
Step-by-step explanation:
The statement is true; insurance companies do base their insurance policies on the probability of a claim occurring and the potential size of that claim. The premiums must be calculated in such a way that they cover the expected claims, the costs to operate the insurance company, and also provide a profit margin. Factors like investment income on reserves, administrative costs, and the varying risks of different groups can complicate the pricing of policies.
Insurance premiums that are set at actuarially fair levels will reflect the risk associated with a particular group. For example, individuals with a chronic disease or those who are elderly may face higher premiums due to their increased health risks. Similarly, young male drivers may be charged more for car insurance because they are statistically more likely to be involved in accidents.
Moreover, with a vast number of clients, insurance companies can negotiate for lower service rates, which benefits consumers through reduced costs when buying insurance and helps the company save money when paying out claims.