Which of the following reflects a key concept of insurance?

The choice indicating that group risks can be predicted more accurately reflects a fundamental principle of insurance known as risk pooling. In insurance, the concept of pooling is essential to the financial stability of insurance companies. By grouping together a larger number of similar risks, insurers can rely on statistical data and actuarial models to forecast the likelihood of claims, which reduces uncertainty.

When individual risks are grouped, their collective outcomes tend to become more predictable because the variability of individual circumstances tends to average out. This allows insurers to set premiums that are more accurately aligned with expected losses. For example, health insurance is often provided to groups (like employees of a company), allowing the insurer to better estimate costs based on the demographics of the group rather than on individual medical histories alone.

The other options do not capture this central tenet of insurance in the same way. While it may seem intuitive that increasing the number of policies would lower risk, this doesn’t always hold true if the policies cover highly diverse or uncorrelated risks. Individual risks may vary significantly and can complicate underwriting and pricing, ultimately making them less predictable compared to group assessments. Lastly, while payouts are a critical aspect of insurance to determine policy structures, they are generally based on claims rather than strictly pre-determined values