ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The law of large numbers states that as the number of policyholders increases, the more confident the insurance company is its prediction will prove true. Therefore, they attempt to acquire a large number of similar policyholders who all contribute to a fund which will pay the losses.

Detailed explanation-2: -The law of large numbers states that if the amount of exposure to losses increases, then the predicted loss will be closer to the actual loss. The use of the law of large numbers allows the number of losses to be predicted better.

Detailed explanation-3: -A risk manager (or insurance executive) uses the law of large numbers to estimate future outcomes for planning purposes. The larger the sample size, the lower the relative risk, everything else being equal. The pooling of many exposures gives the insurer a better prediction of future losses.

Detailed explanation-4: -The law of large numbers allows us to make predictions about the long-term behavior of random variables based on the results of a large number of experiments assuming all of the trials or observations are independent of each other.

Detailed explanation-5: -Insurers rely on the law of large numbers to predict the risks. According to this law, the average of the results obtained from a large number of trials will move closer to the expected result as more and more trials are performed.