Question

According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that it insures?
A) Fewer losses should be expected to occur.
B) The amount of premiums needed to cover losses should decrease.
C) The volatility of the insurance company's underwriting results should increase.
D) The difference between actual and expected results should decrease

Answer 1

Law of large numbers tells that increase in sample size will bring the Mean closer to the average of the population. When any large entity which has a rapid growth rate cannot be able to maintain that pace forever. There will be high probability that repeating the same process a large number of times. This may result in getting the mean closest to the expected value.

So, If the company increases the number of loss exposures that it insures the difference between the actual and expected results would decrease.

Option 'D' is correct