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The Law of Large Numbers In Life Insurance

The Law of Large Numbers In Life Insurance

The law of large numbers states that as the size of the sample (insured population) increases, the actual loss experience will more and more closely approximate the true underlying probability. This means that the insurer’s statistical group must be large enough to produce reliable results, and that the group actually insured must be large enough to produce results that are consistent with what probability predicts. Insurance relies on the law of large numbers to minimize the speculative element and reduce volatile fluctuations in year-to-year losses.

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The greater the number of exposures (lives insured) to a peril (cause of loss/death), the less the observed loss experience (actual results) will deviate from expected loss experience (probabilities).

Uncertainty diminishes and predictability increases as the number of exposure units increases. It would be a gamble to insure one life, but insuring 500,000 similar persons will result in death rates that will vary little from the expected. A peril is a cause of a loss. In life insurance, the event against which protection is granted, death is uncertain for any one year, but the probability of death increases with age until it becomes a certainty. If a life insurance policy is to protect an insured during his or her entire life, an adequate fund must be accumulated to meet a claim that is certain to occur.

Insurance Law And Practice - ICSI
The Law of Large Numbers In Life Insurance The Law of Large Numbers In Life Insurance Reviewed by Ikpokolo Francis on Thursday, May 18, 2017 Rating: 5

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