What does the term "fundamental principles of insurance" include?

The term "fundamental principles of insurance" encompasses essential concepts that underpin how insurance operates. Key among these principles are risk pooling, risk transfer, and the law of large numbers.

Risk pooling refers to the process by which multiple individuals or entities come together to share the financial risk associated with potential losses. By pooling their resources, they are able to mitigate the impact of those losses, since not all members will suffer a loss at the same time.

Risk transfer is the core function of insurance; it allows individuals to shift the financial burden of potential losses to an insurer. When someone purchases insurance, they effectively transfer their risk of loss to the insurance company, which takes on the responsibility of financial protection in exchange for premium payments.

The law of large numbers is a statistical principle that plays a critical role in the predictability of insurance results. It states that as the number of similar exposures increases, the actual loss experience will tend to converge towards the expected loss, allowing insurers to more accurately calculate premiums and manage risk.

Understanding these principles is crucial for anyone involved in the insurance field, as they form the foundation for pricing, underwriting, and risk management practices. The other options mention aspects of insurance, but they do not encompass the broad and foundational nature of these