The primary reason the insurance mechanism functions successfully is the:
A)existence of adverse selection
B)ease with which underwriting results can be measured
C)predictability of losses via the law of large numbers
D)existence of many non-industrial nations

Question

Quizplus · Accepted Answer

The predictability of losses via the law of large numbers is the primary reason the insurance mechanism functions successfully. This law allows insurers to accurately estimate the frequency and severity of losses based on a large pool of similar risks, enabling them to set premiums that cover claims while still earning a profit. Adverse selection, the tendency for higher-risk individuals to seek insurance coverage more than lower-risk individuals, can disrupt this process, but measures such as risk assessment and pricing adjust for it. The ease with which underwriting results can be measured and the existence of non-industrial nations are not significant factors in the success of insurance.

The Primary Reason the Insurance Mechanism Functions Successfully Is The