Question

According to the law of large numbers, what should happen as an insurer increases the number of units insured?

a. Underwriting expenses should decrease.
b. The insurer's profitability should become more variable.
c. Actual results will more closely approach expected results.
d. any situation in which the probability of loss is zero.

Answer 1

As an insurer increases the number of units insured, actual results will start to align more closely with expected results, enabling more accurate predictions of claims and financial stability.

Step-by-step explanation:

According to the law of large numbers, as an insurer increases the number of units insured, c. Actual results will more closely approach expected results. This principle states that with a larger pool of insured units, the insurer can predict claims more accurately, allowing premiums collected to align closely with the costs of claims, administrative expenses, and desired profits.

This also helps in mitigating the risk of facing significant financial losses due to high-risk groups and maintains actuarial fairness among policyholders.