According to the law of large numbers, what happens as the number of similar units increases?

As the number of similar units increases, the predictability of the loss improves because the law of large numbers states that the larger the sample size, the closer the actual results will be to the expected outcome. In the context of insurance, this means that as more policies are written and insured units are added, the insurer can better predict the overall losses and claims that will need to be paid out.

This improved predictability occurs because the variability of individual claims becomes less significant when assessing the average risk across a larger population. Consequently, insurers can more effectively set premiums and reserves based on historical data, which leads to enhanced stability and predictability in financial outcomes.

In contrast, the options that suggest a decrease in predictability or increased costs don’t align with the foundational principles behind risk pooling and statistical analysis. As the sample size grows, insurance companies can benefit from economies of scale and reduced uncertainty, ultimately resulting in improved predictability of losses.