General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
A small employer with only eight employees has experienced widely fluctuating health claims year to year. This volatility occurs primarily because:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The law of large numbers requires a sufficient number of similar exposures before aggregate losses stabilize near the expected value. With only eight employees, a single serious illness can swing the group's claims by a huge percentage, so experience-based prediction is not credible. Insurers respond by giving small groups' experience less credibility, blending it with manual or pool rates, or applying pooling charges. The volatility is a statistical consequence of small pool size, not of fraud or regulation.
Why the other options are wrong
- B) The volatility has an actuarial explanation — small numbers — not a conclusion that employees are deliberately causing losses.
- C) The law of large numbers is a mathematical principle, not a statute, and cannot be suspended for any group size.
- D) Small groups are routinely pooled or rated against broader experience; there is no prohibition on combining them with other risks.
Memory hook
Eight people = one big claim moves everything. Numbers need size to be credible.