What does the law of large numbers in insurance suggest?

The law of large numbers is a fundamental principle in insurance that states as the size of a pool of risk increases, the actual loss experience will more closely approximate the expected loss. This principle relies on the idea that while individual outcomes are unpredictable, when viewed collectively, the average of those outcomes will become more stable and predictable.

Choosing the option that states it predicts group losses, not individual events, aligns perfectly with this principle. In insurance, the law of large numbers allows insurers to estimate expected claims based on the collective data of a larger group. This means that while an individual policyholder might experience a loss at any given time, the overall losses within a larger risk pool can be anticipated more accurately, leading to better risk assessment and premium setting.

The other options do not accurately describe the law of large numbers. For example, stating that it predicts large losses will happen with certainty misrepresents the concept; rather, it acknowledges the uncertainty of individual events. The assertion that it eliminates risk entirely is incorrect, as the law does not remove uncertainty but rather allows for more effective management of it. Lastly, the notion that smaller groups will incur fewer claims contradicts the principle, as smaller groups tend to have higher variability in loss experience compared to larger groups. Thus