General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
For the law of large numbers to produce reliable loss predictions, the insured exposures in the pool should be:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The law of large numbers works when an insurer covers a large number of reasonably similar, independent exposures - for example, thousands of policyholders of similar age and health. As the pool grows, actual losses converge toward expected losses, enabling accurate premium setting. The exposures need not be identical, but they must be similar enough that past experience predicts future results.
Why the other options are wrong
- B) A small pool produces random results; a few losses can badly distort the prediction.
- C) Exact identity is neither possible nor required; reasonable similarity suffices.
- D) Concentrating exposures creates correlation - many losses at once - which undermines prediction.
Memory hook
Many and similar = trustworthy numbers. Few or clustered = guesswork.