General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
An insurer writes only 40 disability policies in a new occupational class and prices the group using its own claims from that single year. The actuarial weakness of this approach is that:
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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 when the number of independent, similar exposures is large. With 40 policies and a single year of experience, random variation dominates: a couple of unexpected large claims could make the group look far riskier — or far safer — than it truly is. Insurers therefore blend small-group experience with broader industry data (credibility weighting) and require minimum group sizes. Pricing on a tiny, volatile sample risks inadequate premiums and financial strain.
Why the other options are wrong
- B) Small groups are statistically volatile, not accurate; the opposite is true.
- C) The law of large numbers is a general statistical principle that applies to any pool of similar exposures, large or small, but its predictive power is weak in small pools.
- D) Premiums are set for the group, never matched to each individual's actual claims, and small pools do not change that.
Memory hook
Forty coins can all land heads; forty thousand cannot. Small pools are a credibility gamble.