General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Why does the law of large numbers make insurance possible?
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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 grows, actual losses converge toward expected losses. This predictability lets the insurer set premiums that will cover claims and expenses. The larger and more homogeneous the pool, the more accurate the prediction — which is why insurers group similar risks together.
Why the other options are wrong
- B) The law predicts outcomes for a group, never for an individual; any single insured can suffer a loss at any time.
- C) Premiums are not held until losses occur; they are collected and pooled to fund expected claims.
- D) Individualized loss-based pricing would defeat risk pooling and make insurance unaffordable; premiums reflect group experience, not one person's losses.
Memory hook
Big group, predictable bill. The crowd absorbs the shock so no single person is destroyed by one loss.