The principle that larger numbers of similar exposure units lead to more accurate loss forecasts is known as the

The principle that larger numbers of similar exposure units lead to more accurate loss forecasts is known as the

• A. Law of Large Numbers
• B. Principle of Indemnity
• C. Moral Hazard
• D. Subrogation

Answer: (A)

This is about the Law of Large Numbers: as the number of similar exposure units grows, the average loss observed becomes a more reliable estimate of the expected loss. With a small pool, actual losses can swing widely around the average, but as the pool expands, these fluctuations average out and the forecast becomes more accurate. In insurance terms, a larger pool of policies or claims yields more predictable aggregate losses, which is why insurers rely on big pools to set premiums and reserves. The other concepts address different ideas—indemnity relates to restoring the insured’s financial position after a loss, moral hazard to the insured's behavior changing because of insurance, and subrogation to the insurer’s right to recover from a third party.

This is about the Law of Large Numbers: as the number of similar exposure units grows, the average loss observed becomes a more reliable estimate of the expected loss. With a small pool, actual losses can swing widely around the average, but as the pool expands, these fluctuations average out and the forecast becomes more accurate. In insurance terms, a larger pool of policies or claims yields more predictable aggregate losses, which is why insurers rely on big pools to set premiums and reserves. The other concepts address different ideas—indemnity relates to restoring the insured’s financial position after a loss, moral hazard to the insured's behavior changing because of insurance, and subrogation to the insurer’s right to recover from a third party.