What principle states that larger groups of similar risks provide more reliable predictions of possible losses?

The principle that states larger groups of similar risks provide more reliable predictions of possible losses is the Law of Large Numbers. This statistical principle asserts that as the size of a sample increases, the average of the sample tends to get closer to the expected value or mean of the population from which it is drawn. In the context of insurance, when a larger group of similar risks is pooled together, it leads to more accurate estimations of loss frequencies and magnitudes.

This reliability arises because the variations that might greatly affect smaller groups tend to average out in larger groups. For instance, if an insurer has a small group of policyholders, an unusual event (like a natural disaster) could have a significant impact on the overall losses of that group. However, when dealing with a larger pool of policyholders, the impact of such random events becomes diluted across the broader base, allowing for more stable and predictable loss projections.

While other concepts like risk sharing or risk pooling are related to the overall theory of managing and distributing risk, they do not specifically describe the statistical relationship that the Law of Large Numbers emphasizes regarding the predictability of losses in larger groups. This is crucial for insurance companies, as it allows them to set premiums, reserves, and overall financial strategies with greater