What is the significance of having a large pool of insured individuals?

Having a large pool of insured individuals is significant because it helps insurers predict overall losses more accurately. This concept is rooted in the law of large numbers, which states that as the number of similar risk units (in this case, insured individuals) increases, the actual loss experience will more closely align with the expected loss calculations.

By having a broad and diverse group of policyholders, insurers can gather extensive data on risk factors, which allows them to assess probabilities of occurrences such as death, illness, or accidents. This improved accuracy in assessing risk leads to better pricing of premiums and financial stability for the insurance company. Consequently, this method reduces the likelihood of underwriting surprises and allows for more reliable financial planning, both for the insurer and the insured.

The incorrect choices reflect common misconceptions:

• Having a large pool does not guarantee low premiums for high-risk individuals, as their rates would typically be higher based on their individual risk profiles.

• It is unrealistic to expect that everyone will experience the same loss; losses will vary significantly among individuals within the pool.

• While a larger pool can support higher payouts through increased premium collection, it does not mean that it will not affect premiums; rather, premiums are adjusted based on overall risk assessment and expected claim payouts.