General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
For the law of large numbers to produce reliable premium predictions, the losses in the insured group must be:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The law of large numbers assumes that losses occur randomly and are fortuitous — accidental and beyond the insured's control. If losses are deliberately caused, the pattern is distorted: intentional losses are correlated with the insureds' behavior and are not governed by the chance distribution the tables assume. This is one reason insurers exclude intentional, self-inflicted losses and underwrite to screen out fraud. Randomness is what lets actual losses converge on expected losses as the pool grows.
Why the other options are wrong
- B) The law requires similarity of risk characteristics, not identical loss amounts; loss severity varies from one claim to the next.
- C) If every insured were certain to incur a loss, there would be no risk to pool and no insurance; losses must be uncertain.
- D) Geographic concentration actually threatens predictability by creating correlated, catastrophic exposures; the law favors diversification.
Memory hook
Random losses, reliable math. When losses get staged, the tables stop working.