General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
The law of large numbers allows an insurer to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The law of large numbers states that as the number of similar, independent exposures increases, the group's actual losses converge toward the expected value — so the insurer can price premiums with increasing confidence. It predicts group outcomes, never individual outcomes. This is why insurance requires large pools.
Why the other options are wrong
- B) The law of large numbers says nothing about which specific individuals will suffer a loss — individual losses remain uncertain and fortuitous.
- C) It improves prediction but does not remove catastrophic risk; reinsurance and surplus lines address that, not the law of large numbers.
- D) Premiums are based on risk classification, not a flat rate for everyone; the law of large numbers concerns loss prediction, not rate equality.
Memory hook
The crowd is predictable even when every face in it is a surprise. Bigger pool = sharper pencil for the actuary.