What does the Law of Large Numbers help to predict?

The Law of Large Numbers is a fundamental statistical principle that states that as the size of a data set increases, the actual results will converge on the expected results. In the context of insurance, this law plays a crucial role in predicting the likelihood of future losses.

Insurance operates on the principle of pooling risk; by insuring a large number of policyholders, insurers can predict overall losses with greater accuracy. The Law of Large Numbers allows insurers to estimate the frequency and severity of claims, which helps them determine appropriate premiums and reserves. With a larger pool of insured individuals, the insurer can better predict how many people will file claims and how much they might need to pay out based on historical data and statistical averages.

This foundational concept underpins the entire structure of insurance as a financial service, enabling companies to maintain solvency and manage risk effectively. Other options, while relevant in the insurance and financial fields, do not directly relate to what the Law of Large Numbers specifically addresses in the realm of predicting losses.