An actuary at a property insurance company is analyzing a proposal to insure a massive new development of 20,000 identically built track homes. The company intends to utilize the Law of Large Numbers to establish accurate premium rates for this portfolio. Based on the principles of the Law of Large Numbers, which of the following statements are correct regarding this scenario? (Select all that apply)
- As the number of these insured homes increases, the company's actual aggregate loss experience will more closely approach its statistically expected losses.Cevap
- BBy pooling 20,000 homes together, the developer is utilizing the risk handling method of risk avoidance, as the large group eliminates the chance of financial loss.
- The homes must constitute homogeneous exposure units, meaning they share similar characteristics and face similar pure risks, for the statistical predictions to be reliable.Cevap
- DThe insurer can also effectively apply this principle to speculative risks, such as guaranteeing the future market resale value of the homes against economic downturns.
Cevap
The correct statements are that actual aggregate losses will more closely approach expected losses as the pool grows, and that the homes must represent homogeneous exposure units facing pure risks.
The correct statements accurately define the primary outcome of the Law of Large Numbers (aggregate loss predictability) and its essential requirement (homogeneous exposure units).
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The Law of Large Numbers relies on a large pool of homogeneous exposure units facing pure risk to accurately predict aggregate losses for ratemaking.