General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
For the law of large numbers to produce reliable loss predictions, the exposures in the insurance pool must be:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The law of large numbers works when the insurer covers a large number of similar, independent exposures. As the group grows, actual losses converge toward expected losses, making predictions accurate. Homogeneity matters because mixing unlike risks distorts the statistics, and independence matters because simultaneous losses break the pool. Together these conditions let actuaries set premiums that cover expected claims.
Why the other options are wrong
- B) A small number of exposures produces unreliable predictions; the law requires many, not few.
- C) Catastrophic risks can overwhelm a pool and violate the independence required by the law.
- D) Diverse, unrelated risks produce less predictable group results than similar risks.
Memory hook
Many similar apples make the crop predictable; a pool of mixed fruit ruins the forecast.