The fundamental law of insurance is that what the average person pays in over time cannot be less than what

the average person gets out. In an actuarially fair insurance policy, the premiums that a person pays to the

insurance company are the same as the average amount of benefits for a person in that risk group. Moral

hazard arises in insurance markets because those who are insured against a risk will have less reason to take

steps to avoid the costs from that risk.

Many insurance policies have deductibles, copayments, or coinsurance. A deductible is the maximum amount

that the policyholder must pay out-of-pocket before the insurance company pays the rest of the bill. A

copayment is a flat fee that an insurance policy-holder must pay before receiving services. Coinsurance

requires the policyholder to pay a certain percentage of costs. Deductibles, copayments, and coinsurance
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