Final answer:
Insurance is considered economically feasible when it provides a practical way to hedge against risks at a reasonable cost. Therefore, if the premium is very large in relation to the potential loss, discouraging those with lower risks from purchasing, the insurance is not economically feasible; this statement is false.
Step-by-step explanation:
The statement that insurance is economically feasible if the premium must be very large in relation to the potential loss is false. Insurance is meant to be a practical way for individuals and companies to mitigate against potential risks for reasonable costs. The fundamental law of insurance is that the average person's payments into insurance over time must cover the average person's claims, the costs of running the company, and leave room for the firm's profits. When premiums become excessively high, it discourages people with lower risks from purchasing insurance, leading to a pool of higher-risk individuals which in turn drives up the cost of insurance further.
Maintenance of a balanced risk pool is critical for the economic feasibility of insurance. If only those with a high likelihood of loss purchase insurance, the insurer will have to increase premiums to cover these higher costs, ultimately resulting in the potential for adverse selection where insurance becomes too expensive for those at lower risk, and therefore not feasible.