General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Two applicants of the same age apply for the same disability policy; one is a nonsmoking office worker and the other is a construction worker who smokes. The insurer charges different rates. This difference reflects the principle that:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Risk is not uniform; each individual faces a different chance of loss depending on factors such as age, gender, health status, occupation, lifestyle, and hobbies. Insurance works by grouping individuals with similar risk characteristics so that premiums reflect the expected cost of each class. Classification is central to underwriting: the office worker and the construction worker belong to different risk classes, so their premiums differ even though the product is the same.
Why the other options are wrong
- B) Age is only one factor; occupation, health, and lifestyle also materially affect the chance of loss.
- C) The law of large numbers predicts outcomes for large groups; it does not erase the differences between individuals within the group.
- D) California law generally prohibits unfair discrimination, but it permits classification and premium differences based on legitimate risk factors.
Memory hook
Same age, different risks — occupation, habits, and health set each person's odds.