What is one outcome of accurately predicting risk through the Law of Large Numbers?

Accurately predicting risk through the Law of Large Numbers leads to improved determination of insurance rates. The Law of Large Numbers states that as the number of exposures increases, the actual loss experience will tend to converge towards the expected loss experience. This statistical principle allows insurers to use historical data to predict future events more reliably.

When insurers can accurately predict risks based on a large volume of data, they can more effectively estimate the likelihood of claims and set appropriate premium rates that reflect that risk. This results in a more accurate determination of insurance rates, ensuring that premiums collected are adequate to cover the anticipated losses while allowing for a profit margin.

In this context, understanding risk through the Law of Large Numbers enables the insurance company to charge premiums that are aligned with the true risk of loss, ultimately supporting the financial health of the insurer and providing stable coverage for policyholders.