Which of the following insurance principles states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be?

The principle that states the larger the number of people with a similar exposure to loss, the more predictable actual losses will be is known as the law of large numbers. This principle is fundamental to the insurance industry because it allows insurers to estimate risk more accurately. When a large group of individuals or entities with similar risk profiles is considered, the insurer can predict the overall loss experience more reliably due to statistical patterns emerging from that larger sample size.

For example, if an insurer has a large number of policyholders, even if some individuals experience losses, the average loss across the entire group can be predicted more accurately based on historical data. This predictability helps insurers set premiums and reserve funds appropriately, ensuring they can cover claims as they arise.

Although the other concepts mentioned are important in insurance, they do not specifically relate to the predictable nature of losses based on larger groups. Exposure units refer to measurable quantities of risk, underwriting involves assessing risk for individual applicants, and adverse selection pertains to the tendency of higher-risk individuals to seek insurance more often than lower-risk individuals, making it a challenge for insurers to maintain balance in the risk pool. Thus, the law of large numbers is the correct answer as it underpins how risk is managed in terms of predictability through larger