Which concept is used by insurers to estimate the expected cost of claims over a large sample, assisting premium calculations?

Which concept is used by insurers to estimate the expected cost of claims over a large sample, assisting premium calculations?

• A. Law of large numbers
• B. Principle of indemnity
• C. Insurable interest
• D. Subrogation

Answer: (A)

The law of large numbers explains why insurers can estimate expected claim costs by looking at a large pool of policyholders. When you price insurance, the random outcome of any one claim is unpredictable, but as the number of policies grows, the average claim cost tends to approach the true expected loss. This stability lets actuaries set premiums that reflect the expected cost of claims, plus allowances for expenses and profit. The other concepts relate to contract structure and risk transfer (indemnity to prevent overcompensation, insurable interest to ensure a real stake, subrogation to recover from responsible third parties) but they don’t describe how insurers predict costs across many policies.

The law of large numbers explains why insurers can estimate expected claim costs by looking at a large pool of policyholders. When you price insurance, the random outcome of any one claim is unpredictable, but as the number of policies grows, the average claim cost tends to approach the true expected loss. This stability lets actuaries set premiums that reflect the expected cost of claims, plus allowances for expenses and profit. The other concepts relate to contract structure and risk transfer (indemnity to prevent overcompensation, insurable interest to ensure a real stake, subrogation to recover from responsible third parties) but they don’t describe how insurers predict costs across many policies.