California bars postclaims underwriting for hospital, medical or surgical coverage (Ins. Code §10384): an insurer may not rescind, cancel or limit a policy because it failed to complete medical underwriting and resolve all reasonable questions from the written application before issuing it. Do the homework before issue, not after a claim.

Adverse selection: people with higher-than-average risk are more likely to seek insurance, or more of it. A plan that lets people enroll whenever they expect a big bill fills up with claims. Underwriting is the main defense: limiting coverage, charging more, or declining.

Law of large numbers: the more similar exposure units in a group, the closer actual losses come to expected losses. It lets an insurer estimate about how many members will be hospitalized next year and set premiums from that estimate. It does not say which members, it is not an exact count, and a bigger group makes the estimate more reliable without lowering the loss rate.

Profitable distribution of exposures: a balanced spread of risks across many regions, jobs and risk classes, so that losses stay in line with what premiums were built to pay. Writing only workers at one plant invites a single event hitting everyone at once.