North Caroline Health Insurance – Accident And Sickness Practice Test

Which of the following is a criterion of a viable insurance contract?

Policy tax treatment Large number of similar exposures Investment returns Flexible premium frequency

Correct Answer:

Large number of similar exposures

Explanation:

In insurance, viability hinges on pooling a large number of similar exposures so the insurer can predict losses with reasonable accuracy. With many similar risks spreading across a broad base, the law of large numbers smooths out the individual loss variability, allowing actuarial methods to estimate expected losses, set premiums that cover claims and expenses, and keep the contract financially sustainable. The other factors listed—tax treatment of the policy, investment returns, and the ability to vary premium frequency—are not fundamental criteria for a contract’s viability. They may influence product design or profitability, but they don’t establish the insurer’s ability to predict losses and price risk across a population.

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