Question

When the number of exposure units in an insured group is larger, the degree of credibility of resulting loss experience will be

Select one:

a. increased,

b. decreased,

c. changed only slightly,

d. credibility is unaffected by the number of exposure units.

Answer 1

a) credibility shall be increased. This is due to the ''law of large numbers'' according to which, higher the number of exposure units (policy holders) for a particular insurance class, the higher is the probability that the expected loss as estimated by the insurer will be equal to the actual loss suffered. This is because, the premiums paid by the large number of policyholders shall be used by the insurer to pay the claims of the few policyholders who might have suffered losses. Thus the credibility of the insurer in predicting the actual losses will increase.