safest of all $100 apiece, which is the average value of the damages they cause. Then the intermediate group

could pay $1,000 apiece and the high-cost group $15,000 each. When the level of insurance premiums that

someone pays is equal to the amount that an average person in that risk group would collect in insurance

payments, the level of insurance is said to be “actuarially fair.”

Classifying people into risk groups can be controversial. For example, if someone had a major automobile

accident last year, should the insurance company classify that person as a high-risk driver who is likely to have

similar accidents in the future, or as a low-risk driver who was just extremely unlucky? The driver is likely to
claim to be low-risk, and thus someone who should be in a risk group with those who pay low insurance

premiums in the future. The insurance company is likely to believe that, on average, having a major accident is
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