What premium concept allows the insurer to charge less for policies with similar risks?

The concept that allows insurers to charge less for policies with similar risks is known as the Law of Large Numbers. This principle is a fundamental aspect of actuarial science and underwriting in insurance. It states that as the number of exposure units (such as insured individuals or properties) increases, the actual loss experience will more closely match the expected loss experience.

This mathematical principle allows insurers to predict losses more accurately, as they can observe patterns and trends from a larger dataset. When risks are pooled together, like in a large group, the variability of the total losses among that group decreases. Consequently, insurers can offer lower premiums because the collective data supports a more stable and predictable loss frequency and severity. This stability reduces the financial risk associated with insuring individuals, enabling the insurer to apply lower premiums for policies with similar risks.

This concept is particularly significant in group insurance, where a large number of individuals are covered under a single policy, allowing for risk reduction through pooling. However, it is the Law of Large Numbers that fundamentally underpins the ability to charge less based on the aggregation of similar risks.