General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A health insurer considers writing a block of disability policies covering only 100 similar employees. Which concern is most closely tied to the law of large numbers?
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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 only with a sufficiently large number of similar exposures. With only 100 risks, a single large claim can dramatically distort the loss experience, so actual results will fluctuate widely around the prediction and premiums become unstable. This is why insurers seek large, homogeneous blocks of business and why the results of very small groups are volatile and hard to price reliably. Pooling requires enough units for the averages to be stable.
Why the other options are wrong
- B) Rejecting applicants is an underwriting decision; it is not a consequence of the law of large numbers.
- C) Insurance always involves pooling; even a small group is priced on its pooled experience.
- D) Small pools are more volatile, not automatically cheaper; pricing must reflect the greater uncertainty.
Memory hook
Small sample equals shaky forecast, so pools must be big.