What does the law of large numbers enable an insurer to do?

The law of large numbers is a fundamental principle in insurance and statistics that states as the number of observations increases, the average of those observations will tend to get closer to the expected value. For insurers, this means they can predict losses more accurately when they have a larger pool of insured individuals or a greater number of similar insured events.

By relying on a large enough dataset, insurers can estimate future claims based on historical data, thus allowing them to determine the likelihood and financial impact of losses that may occur within a particular group. This predictive capability is essential for setting premium rates and ensuring that the insurer can cover future claims while remaining profitable. Therefore, the law of large numbers enables more precise predictions about potential losses, which is crucial for effective risk management and financial planning in the insurance industry.