What does the Law of Large Numbers help insurance companies to do?

The Law of Large Numbers is a fundamental principle in statistics that applies to insurance. It states that as the size of a sample increases, the actual results will get closer to the expected results. In the context of insurance, this means that as an insurance company has a larger number of policies or insured individuals, it can more accurately predict the frequency and amount of losses that will occur within that group.

By effectively using the Law of Large Numbers, insurance companies can estimate their expected losses more reliably. This allows them to set appropriate premium rates and maintain financial stability since they can anticipate the potential risks and losses based on the experiences of a larger group rather than relying on a small sample size that may lead to greater variance in results. Thus, the ability to predict loss frequency within a group is crucial for insurers to manage risk and ensure they can cover claims made by policyholders.