An insurance company must establish what kind of premiums to counterbalance risk?

The correct answer is adequate premiums. Insurance companies operate by assessing the risks associated with providing coverage to their policyholders. To ensure that they can cover potential claims and maintain financial stability, insurers must charge premiums that accurately reflect the level of risk they are taking on. Adequate premiums are crucial because they are designed to be sufficient to pay for the expected claims, administrative costs, and a profit margin.

When premiums are adequate, they help the insurance company to operate sustainably, allowing it to fulfill its obligations to policyholders without incurring losses. If premiums are set too low, the company may face financial difficulties when larger claims arise. Conversely, charging excessively high premiums can deter potential customers and lead to a loss of market competitiveness.

Thus, adequate premiums serve as a fundamental principle in insurance underwriting and pricing strategy, ensuring that coverage remains both financially viable for insurers and affordable for consumers.