Which principle is used by life insurance companies to estimate future death rates?

The principle that life insurance companies use to estimate future death rates is the Law of Large Numbers. This principle asserts that as the number of similar but independent events increases, the actual ratio of outcomes will converge to the expected ratio of outcomes. In the context of life insurance, this means that by underwriting a large enough group of policyholders, insurers can predict the overall mortality rate with greater accuracy.

The Law of Large Numbers allows insurers to gather extensive data on the life spans and death rates of a large sample, thereby enabling them to set premiums and reserves based on statistically reliable averages. The more data the insurer has, the more precise and dependable their estimations of future death rates become, minimizing the risks associated with underwriting.

While the Law of Average and the Law of Frequency relate to general statistical concepts, they do not specifically address the estimation of death rates in the way the Law of Large Numbers does. The Law of Probability pertains to the likelihood of specific outcomes, but it is the application of the Law of Large Numbers that underpins the practical workings of life insurance by ensuring predictions become more reliable with larger samples, supporting the insurer's financial stability.