In the context of insurance, what does "probability theory" provide?

Probability theory provides a framework to estimate the likelihood of risks and losses, which is a foundational aspect of the insurance industry. By applying probability theory, insurers are able to assess the risk associated with various insurance products and determine premium pricing based on the estimated likelihood that claims will be filed.

This framework aids in underwriting processes—helping insurers identify which applicants are more likely to experience losses—and in actuarial science, where historical data is analyzed to predict future claims. Consequently, using probability theory allows insurance companies to develop policies that are financially viable while also offering protection to policyholders.

Other options, while they touch on important aspects of insurance practice, do not capture the primary function of probability theory. Ethical decision-making in claims processing, regulatory compliance, and customer satisfaction are significant areas, but they do not fundamentally address the concept of estimating risks, which is at the core of effective insurance operations and financial stability.