All of the following statements about insurance are true EXCEPT:

The statement that is false is B. The Law of Large Numbers, a fundamental principle of insurance, posits that as the number of insured units increases, the insurer's ability to predict future losses becomes more accurate. The actual loss experience of the group will get closer to the expected loss experience. This principle does not state that the absolute number of losses will decrease. In fact, with a larger pool of insureds, the total number of losses is expected to rise proportionally, but the loss rate becomes more stable and predictable. The other options correctly describe fundamental insurance concepts: exchanging a premium for protection against a large loss (A), transferring risk (C), and retaining partial risk through deductibles (D).

A. This is the definition of the insurance principle. The insured pays a small, certain premium in exchange for protection against a large, uncertain financial loss.

C. This describes risk transfer, the primary function of insurance. The insured shifts the financial consequences of a potential loss to the insurance company.

D. Deductibles are a form of risk retention or risk sharing, where the insured agrees to bear the initial portion of a loss, reducing moral hazard and premiums.

1. Rejda, G. E., & McNamara, M. J. (2017). Principles of Risk Management and Insurance (13th ed.). Pearson Education. In Chapter 2, "Insurance and Risk," the Law of Large Numbers is explained as a principle that improves the accuracy of loss prediction as the number of exposure units increases, not that it decreases the number of losses (pp. 26-27).

2. Virginia Bureau of Insurance. (2023). Virginia Life, Annuities & Health Insurance License Exam Content Outline. This official document outlines the core concepts for licensure, including "Risk" (transfer, sharing, retention) and the "Nature of Insurance," which align with options A, C, and D as correct statements of insurance principles. See Section I.A. "Insurance Regulation" and I.B. "General Insurance."

3. Vaughan, E. J., & Vaughan, T. (2008). Fundamentals of Risk and Insurance (10th ed.). John Wiley & Sons. Chapter 3, "The Insurance Device," clarifies that insurance functions by combining a large number of exposure units to make individual losses collectively predictable. It explicitly states the law of large numbers improves predictability, not reduces loss frequency (pp. 35-36).