Law Of Large Numbers
Definition of "Law of large numbers"
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.
Popular Insurance Terms
Information generated by the medical information bureau (MIB) and made available to member companies concerning medical information of applicants for life and health insurance. Member ...
Company not licensed by a particular state to sell and service insurance policies within that state. ...
Latin phrase meaning "beyond power or authority" describing an act by a corporation that exceeds its legal powers. For example, corporations do not have the authority to engage in the ...
Approved or accepted policy for a particular type of risk. The only type of risk covered by a standard form mandated by law is the fire policy. In 1886, New York adopted a standard fire ...
Insurance on the life of the employee, paid for by the company, with the company being the beneficiary under the policy. This insurance vehicle is being used more and more to fund ...
Entity maintained by the Teachers Insurance Annuity Association. The fund essentially serves college faculties and staff, who pay premiums through salary deductions toward a tax-sheltered ...
Measurement of the response of the cash flow of an insurance company to various interest rate scenarios; for example, how rising interest rates will affect the number of life insurance ...
Acquisition and employment of assets in order to maximize the return on these assets through: establishment of financial planning objectives; development of financial plans by which these ...
Additional amount of surplus generated by an additional amount of capital to be included in book value surplus. This additional surplus is necessary to act as a supplement to the statutory ...
Have a question or comment?
We're here to help.