claims. For most insurance companies, the insurance premiums coming in and the claims payments going out

are much larger than the amounts earned by investing money or the administrative costs.

Thus, while factors like investment income earned on reserves, administrative costs, and groups with different

risks complicate the overall picture, a fundamental law of insurance must hold true: The average person’s

payments into insurance over time must cover 1) the average person’s claims, 2) the costs of running the

company, and 3) leave room for the firm’s profits.

Risk Groups and Actuarial Fairness

Not all of those who purchase insurance face the same risks. Some people may be more likely, because of

genetics or personal habits, to fall sick with certain diseases. Some people may live in an area where car theft
or home robbery is more likely than in other areas. Some drivers are safer than others. A risk group can be
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