Florida Insurance Licensing 2025 – 400 Free Practice Questions to Pass the Exam

The law of large numbers is a fundamental principle in statistics and insurance that asserts that as the number of similar exposures increases, the accuracy of predictions about future losses also improves. This principle operates on the understanding that while individual outcomes may vary, the aggregate results of a sufficiently large sample will tend to stabilize around a predictable average.

In the context of insurance, this means that when an insurer has a larger pool of policyholders, they can gather more data about loss experiences. This data allows the insurer to make better predictions regarding future claims, as the randomness of individual loss occurrences becomes less impactful when viewed over a larger group. The result is more accurate risk assessment and premium pricing based on statistical analysis.

This principle supports the viability of insurance as it helps ensure that premiums collected will cover the expected losses. Therefore, the accuracy of financial forecasting and actuarial predictions increases with the size of the data set, reinforcing the reliance on this law within the insurance industry. The other options do not capture the core essence of the law of large numbers and its significance in improving accuracy in predictions of insurance losses.