ECONOMICS
INSURANCE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The loss exposures must be independent
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There must be a large number of similar loss exposured
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There must be a random or chance occurrence of losses
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There must be a large number of insureds experiencing the same loss at the same time out of the same event
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Detailed explanation-1: -Which of the following correctly describes the law of large numbers? It states that as a group’s size increases, it is easier to predict the number of future losses over a specific time period.
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: -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-4: -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.