What principle aims to determine the cost of insurance based on large amounts of historical data?

The principle that aims to determine the cost of insurance based on large amounts of historical data is the Law of Large Numbers. This principle states that as the size of a sample increases, the estimated outcomes become more accurate and closer to the expected value. In insurance, this means that with a large enough pool of policyholders, insurance companies can predict losses and set premiums accordingly. By relying on historical data from a significant number of policyholders, insurers can understand the likelihood of various risks and ultimately calculate the necessary premiums to cover these risks.

While the Law of Averages is often mentioned in similar contexts, it does not have the same statistical foundation as the Law of Large Numbers and can sometimes be misinterpreted. Probability theory is a broader mathematical framework that underpins the calculations used in insurance but does not specifically focus on the aggregation of large data sets impacting cost. Risk assessment involves evaluating potential risks to minimize impacts but does not directly relate to the statistical principle of using large historical data to set insurance costs. Therefore, the Law of Large Numbers is the correct answer as it directly relates to using extensive data to inform insurance pricing.