Insurance Broker Certification Practice Exam

Which of the following reflects the benefits of a large risk pool in insurance?

1. Increased unpredictability of losses

2. Greater potential for higher premiums

3. Improved accuracy in predicting losses

4. Lower administrative costs

The correct answer is: Improved accuracy in predicting losses

A large risk pool in insurance refers to the grouping of a significant number of policyholders who share similar risks, which offers several advantages. One of the primary benefits is improved accuracy in predicting losses. When a large number of similar risks are pooled together, actuaries can analyze historical data to determine the likelihood of certain events occurring within that group more effectively. This allows for more precise premium setting and risk assessment. Additionally, with a larger pool, the impact of extreme losses on the overall insurance fund is reduced, as those losses are spread across many policyholders. This statistical approach helps insurers create more stable financial models, allowing for better planning and management of their resources. Meanwhile, the other choices do not represent the advantages brought by a large risk pool. Increased unpredictability of losses and greater potential for higher premiums are associated with smaller or more selective risk groups where fewer data points make precise predictions difficult. Lower administrative costs might be a potential benefit of large-scale operations but does not directly connect to the principle of risk pooling and the associated predictive accuracy.