ASA Agronomy Practice Test & Exam Prep

Why does the law of large numbers help an insurer price risk more reliably?

It eliminates all catastrophic losses It makes individual losses identical A larger pool tends to make actual aggregate results more predictable relative to expected results It guarantees every policyholder will have a claim

Correct Answer:

A larger pool tends to make actual aggregate results more predictable relative to expected results

Explanation:

As the number of similar exposure units increases, actual loss experience tends to become more stable around expected loss experience. This improves the insurer's ability to estimate frequencies and set premiums.

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