Insurance Broker Certification Practice Exam

According to the Law of Numbers, what happens as the number of insured individuals increases?

1. Premiums become less predictable

2. Losses become more manageable

3. Actual losses become more predictable

4. Claims processing becomes slower

The correct answer is: Actual losses become more predictable

The correct answer highlights a fundamental principle in insurance known as the Law of Large Numbers. As the number of insured individuals increases, the larger dataset allows insurers to observe patterns and trends over time, leading to a more accurate estimation of losses. This statistical understanding helps in predicting future claims more reliably. With a greater number of policies, the randomness of individual losses balances out, making the overall losses of the group more consistent and predictable. This is crucial for insurers as it enables them to set more accurate premiums and maintain financial stability. Essentially, when there are thousands or millions of insured individuals, the law helps to smooth out anomalies, allowing insurers to predict actual losses with greater confidence.