Why do insurers prefer a large number of similar objects?

Why do insurers prefer a large number of similar objects?

• A. Lower premiums
• B. Avoid data collection
• C. Reliable statistics for pricing
• D. Eliminate risk completely

Answer: (C)

Pricing insurance rests on predicting how often claims will occur and how costly they’ll be. A large number of similar objects provides a stable basis for these predictions because the law of large numbers makes the average loss per policy converge toward the true expected loss as the pool grows. That stability yields reliable statistics you can base premiums on, covering expected claims plus expenses and profit. So the option describing reliable statistics for pricing is the best fit. The other ideas don’t capture why a big, homogeneous pool helps: larger pools don’t automatically guarantee lower premiums, data collection isn’t avoided but strengthened by more data, and no pool can eliminate risk completely.

Pricing insurance rests on predicting how often claims will occur and how costly they’ll be. A large number of similar objects provides a stable basis for these predictions because the law of large numbers makes the average loss per policy converge toward the true expected loss as the pool grows. That stability yields reliable statistics you can base premiums on, covering expected claims plus expenses and profit. So the option describing reliable statistics for pricing is the best fit. The other ideas don’t capture why a big, homogeneous pool helps: larger pools don’t automatically guarantee lower premiums, data collection isn’t avoided but strengthened by more data, and no pool can eliminate risk completely.