Which principle do insurers use to predict changes in risk across a large group?

• A. Law of large numbers
• B. Moral hazard
• C. Adverse selection
• D. Principle of indemnity

Answer: (A)

Pooling a large number of similar risks makes outcomes more predictable. This relies on the law of large numbers: as the group grows, the actual losses tend to average out toward the expected losses, allowing insurers to estimate premiums, reserves, and overall risk with greater accuracy. In a big pool, the variability of individual claims smooths out, so changes in risk across the group become more predictable. The other terms describe different phenomena (moral hazard, adverse selection, indemnity) and don’t explain why risk becomes more predictable when you look at a large population.