Which law serves as the foundation for calculating insurance rates based on the statistical prediction of loss?

The foundation for calculating insurance rates based on the statistical prediction of loss is the Law of Large Numbers. This law states that as the number of exposure units (such as policies, vehicles, etc.) increases, the actual loss experience will tend to get closer to the expected loss. This principle allows insurers to predict future losses more accurately based on historical data.

By utilizing the Law of Large Numbers, insurers can spread risk across a large pool of policyholders, which helps in determining premiums that adequately reflect the anticipated losses while maintaining profitability. This statistical approach is critical for insurers to manage risk effectively and ensure that they can pay claims when they arise.

Conversely, while the Law of Averages may seem similar, it does not have the same statistical underpinning or reliability in predicting outcomes. The Law of Mortality pertains specifically to life insurance and mortality rates, focusing on life expectancy rather than general loss prediction across various types of insurance. The Law of Risk is not a recognized statistical law in the same context and does not specifically relate to the calculation of insurance rates.