What is required to ensure a randomly selected and large loss exposure?

To ensure a randomly selected and large loss exposure, it is essential to have a diversified pool of clients with various risks. This diversification helps in spreading the risk among a larger group of individuals, making it more predictable and manageable for an insurance company. When a range of different risks is included in the pool, it reduces the likelihood that a single event will significantly impact the overall claims experience. It allows the insurer to use statistical methods to estimate the expected losses and set premiums appropriately, thus ensuring stability and sustainability of the insurance program.

In contrast, having a single demographic representation would typically lead to concentration of risk, as similar individuals may share common risk characteristics. A minority of the insured with extensive coverage or a small number of high-risk individuals would also create an unbalanced risk pool, potentially resulting in high claims that could destabilize the actuarial balance that insurance relies on. Therefore, a diversified pool is fundamental for effective risk management in insurance.