Insurance companies charge annual premiums to collect revenue, which they then use to pay customers who file claims for damages they incur. Because of the moral hazard problem insurance companies separate customers into groups. Group 1: customers who file few claims & Group 2: customers that file a lot of claims. After creating these groups, what happens to the average annual premium within a group?

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Insurance companies typically charge lower premiums to customers who file fewer claims (Group 1) and higher premiums to those who file more claims (Group 2) to account for the increased risk.

Insurance Companies Charge Annual Premiums to Collect Revenue, Which They