CARD Q006
Why does a large pool of similar, independent exposures help an insurer predict losses?
- Losses become equally distributed among all insureds
- Each person’s actual claim amount can be predicted
- Actual loss experience is more likely to approach expected experience
- The percentage of claims falls to zero as the pool grows
Actual loss experience is more likely to approach expected experience
The law of large numbers improves aggregate prediction. It does not predict exactly which person will suffer a loss.
Why each choice is right or wrong
A. Losses become equally distributed among all insureds
Incorrect. Some insureds may have no claims and others large claims; losses need not be equal.
B. Each person’s actual claim amount can be predicted
Incorrect. Aggregate predictability does not reveal each individual’s actual future loss.
C. Actual loss experience is more likely to approach expected experience
Correct. The law of large numbers improves aggregate prediction. It does not predict exactly which person will suffer a loss.
D. The percentage of claims falls to zero as the pool grows
Incorrect. A larger pool does not eliminate claims.
Review the related terms
Use these lessons to revisit the concepts and try additional practice questions.