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
Trade association whose membership is comprised of section 403(b) plan providers and practitioners. This association has an educational institute that grants the Certified Specialist in ...
Mistake made during the manufacturing process of a product that results in an inherent defect in the product. This mistake is covered under products and completed operations insurance. ...
Model state law of the NAIC that requires that two interest adjusted cost indices must be illustrated within each life insurance policy issued: NET PAYMENTS INDEX; and SURRENDER COST INDEX. ...
Measure of policyholder interest in a variable annuity policy prior to the annuity date. This measure is similar to a unit in a mutual fund. ...
Liability policy that covers all liability exposures for a large group that has something in common. For example, wrap-up insurance can be written for all the various businesses working ...
Value of a share of common stock, derived by dividing the total common stockholders' equity at the end of a period of time by the total number of shares outstanding at the end of the same ...
Figure used in calculating a worker's primary insurance amount (PIA) to determine Social Security benefits in the following manner: calculate the number of years between the worker's ...
Same as term Additional Insured: individual added to a life insurance policy other than the insured named in the policy. For example, an insured father can have a dependent son and daughter ...
Investment risk associated with the possibility that there is a rise in the interest rates after a fixed income security has been purchased resulting in a decline in that security's price. ...
Have a question or comment?
We're here to help.