# Law Of Large Numbers

## Definition of "Law of large numbers"

Written by

Chateaux Realty

Mathematical premise stating that the greater the number of exposures, (1) the more accurate the prediction; (2) the less the deviation of the actual losses from the expected losses (X - x approaches zero); and (3) the greater the credibility of the prediction (credibility approaches 1). This law forms the basis for the statistical expectation of loss upon which premium rates for insurance policies are calculated. Out of a large group of policyholders the insurance company can fairly accurately predict not by name but by number, the number of policyholders who will suffer a loss. Life insurance premiums are loaded for the expected loss plus modest deviations. For example, if a life insurance company expects (x) 10,000 of its policy-holders to die in a particular year and that number or fewer actually die (X), there is no cause for concern on the part of the company's actuaries. However, if the life insurance company expects (*) 10,000 of its policyholders to die in a particular year and more than that number dies (X) there is much cause for concern by actuaries.

#### Have a question or comment?

We're here to help.

## Popular Insurance Terms

Method by which each member of an insurance pool shares in each and every risk written by the other members of the pool. ...

Resident patient of a medical installation. Previously, health insurance benefits were limited to in-patient care. Today health insurance policies provide an extensive list of out-patient ...

Accounting rule found under the Generally Accepted Accounting Principles (GAAP) that prohibits the insurance company from restating assumptions that it made for interest earned, expenses ...

Person who has been authorized by the insurance company to pay a loss (s) incurred by the insured. ...

Rider attached to an ordinary life insurance policy that allows the policy owner to deposit excess premium payments into a separate account from which they can be withdrawn to meet premium ...

Small face amount life insurance policy. ...

Fee paid to an insurance salesperson as a percentage of the premium generated by a sold insurance policy. ...

Legislation in a number of states requiring insurers to pay the face amount of a fire insurance policy in case of total loss to a dwelling (or sometimes another specified type of building), ...

Minimum degree of injury or loss for which an injured party can sue, even though covered by no fault automobile insurance. Traditionally, an accident victim had to prove the other driver ...