The correct calculation of an insurance premium relies upon the determination of the expected monetary value of claims (their probability multiplied by their expected costs)multiplied by the number of policyholders.Over time,the law of averages-arithmetic averages-allows an insurance company to be profitable.

Question

Quizplus · Accepted Answer

The correct calculation of an insurance premium indeed involves determining the expected monetary value of claims, but profitability is more accurately attributed to the law of large numbers, not the law of averages. The law of large numbers allows insurers to predict loss more accurately as the number of policyholders increases, reducing the relative variability of actual loss from expected loss.

The Correct Calculation of an Insurance Premium Relies Upon the Determination