Which statement accurately describes the law of large numbers in insurance?

The law of large numbers is a fundamental principle in insurance, which states that as the number of exposures or policyholders increases, the actual loss experience will converge towards the expected loss rate. This allows insurers to predict loss rates for large groups with a high degree of accuracy. Essentially, when dealing with a larger pool of similar risks, statistical fluctuations tend to average out, resulting in a more stable and predictable outcome for loss rates.

By ensuring that the insurer can accurately estimate the future claims it will face based on historical data, this principle is crucial in helping insurance companies set appropriate premiums, maintain financial stability, and manage risk. The law of large numbers helps insurers mitigate uncertainty and enhances their ability to remain solvent while fulfilling their obligations to policyholders.

Understanding this concept is essential for insurance adjusters, as it underscores the importance of having a large and diverse pool of policyholders in the insurance industry.