General Insurance PrinciplesQuestion 180 of 716
Which mathematical principle allows insurers to predict losses accurately enough to set fair premiums?
a.Law of large numbers
b.Doctrine of adhesion
c.Law of diminishing returns
d.Principle of indemnity
Explanation
The law of large numbers states that as the number of similar exposures grows, actual losses converge on the predicted average. This lets actuaries set premiums that cover expected claims. Indemnity and adhesion are contract doctrines, not predictive tools.
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Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)