General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
The law of large numbers enables accurate prediction because, as the number of similar exposures increases:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The law of large numbers holds that with enough independent, similar exposures, the lawlessness of individual events smooths into statistical regularity: some insureds have losses, others do not, and the deviations average out. Actual losses therefore approach expected losses, which is what lets insurers set premiums before knowing who will claim. The mechanism is convergence through large numbers, not any change in individual probability or any ability to predict specific losses.
Why the other options are wrong
- B) The law of large numbers changes nothing about any individual's probability; it only makes group averages more predictable.
- C) Insurance predicts group outcomes, never which specific insured will suffer a loss.
- D) Premiums are based on the group's expected loss, not matched to each person's actual claims, which would defeat pooling.
Memory hook
One coin flip is a mystery; a million flips are a nearly sure 50-50. That is the whole magic.