The Fundamental Probability Law of Large Numbers in Insurance
What is the fundamental probability law of large numbers that transfers risk from an individual to a group in insurance?
Options: A. Principle of Indemnity B. Principle of Utmost Good Faith C. Principle of Subrogation D. Principle of Large Numbers
Answer
The fundamental probability law of large numbers that transfers risk from an individual to a group is known as the Principle of Large Numbers in insurance.
Explanation: The fundamental probability law of large numbers that transfers risk from an individual to a group is known as the Principle of Large Numbers.
In insurance, this principle states that as the number of insured individuals increases, the more accurately the actual results will mirror the expected results based on probabilities.
For example, if an insurance company insures a large group of individuals against a specific risk, such as car accidents, the company can predict with greater accuracy the number of accidents that will occur within that group, allowing them to set premiums that reflect the level of risk involved.