In terms of risk calculations, what is true about insurance premiums?

Insurance premiums are fundamentally a reflection of the risk associated with insuring an individual or entity. When determining premiums, insurers assess various factors that contribute to the level of risk a policyholder presents. A core principle of insurance is that individuals or groups deemed to be higher risk are charged higher premiums. This is rooted in the idea that those with a greater likelihood of needing to file a claim pose more financial risk to the insurer.

For example, if an individual has a history of health issues or engages in risky activities, the probability of a claim being submitted increases, which justifies a higher premium. Conversely, individuals who are considered lower risk, such as those with healthy lifestyles or no history of significant claims, typically pay lower premiums because they are statistically less likely to require payouts.

The other options reflect misunderstandings about how premiums are determined. They imply that premiums can be uniformly dictated by regulations or that they are standardized across all applicants regardless of personal risk factors, which would overlook the essential principles of risk assessment and pricing in insurance. Thus, option B correctly indicates that higher risks lead to higher premiums, aligning with the fundamental concepts of insurance underwriting and risk management.