General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
According to the law of large numbers, what happens to an insurer's loss predictions as more similar exposure units are added to a risk pool?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
The law of large numbers states that as the number of similar, independent exposure units increases, the variation between actual and expected results shrinks. Actual losses therefore converge on expected losses, and the insurer can predict aggregate losses with greater confidence. This statistical credibility is the foundation of actuarial pricing and is why a large, homogeneous pool is a requirement of an ideally insurable risk.
Why the other options are wrong
- A) Pool size does not change loss frequency; adding similar units leaves each unit's chance of loss intact while making the aggregate outcome more predictable.
- C) Administrative expense has nothing to do with the law of large numbers; the principle concerns the statistical behavior of losses, not the cost of running the company.
- D) The probability of loss for each individual exposure unit is unchanged; what improves is the insurer's ability to forecast total losses for the group.
Memory hook
Like with like, and lots of it. Large and homogeneous is the actuary's dream pool.