The law of large numbers enables an insurer to:

• A. guarantee that no losses will occur
• B. predict average losses more accurately as the number of insured individuals increases
• C. set premiums independently of statistical data
• D. reduce the risk of moral hazard among policyholders

Answer: (B)

Verified step by step guidance

1. Understand the law of large numbers: it is a statistical principle stating that as the number of independent, identically distributed trials increases, the average of the results will get closer to the expected value.
2. Recognize that insurers use this law to predict average losses more accurately by pooling a large number of insured individuals, which reduces the variability of the average loss.
3. Note that the law of large numbers does not guarantee that no losses will occur; rather, it helps in estimating the expected losses more reliably.
4. Understand that premiums are typically set based on statistical data and expected losses, so the law of large numbers supports this process rather than allowing premiums to be set independently of data.
5. Acknowledge that the law of large numbers is unrelated to moral hazard, which concerns the behavior of policyholders after obtaining insurance.