Insurance – in order for the law of large numbers to work, the pooled
The law of large numbers states that the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed. Therefore, it follows that insurers can utilize this principle when designing an insurance policy for insuring cars. Specifically, by collecting data on the frequency and severity of claims over a period of time they can use this information to establish premiums for different age groups or risk categories.
Essentially, insurers assess how likely it is that an insured event will occur in order to calculate how much each customer should pay for coverage. Using the law of large numbers helps them take into account various factors such as location or driving history when determining rates so that they are able to accurately price policies while also managing their own risk exposure – allowing them to remain profitable in the long-term. Ultimately, with sufficient data regarding past events companies can adjust their pricing models accordingly so that customers receive fair fees based on individual circumstances while at same time achieving financial stability.