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
Number of times losses occur, and their severity. These statistics measure expectation of loss, and are critical in establishing a basic premium or the pure cost of protection that is based ...
Organization that is part of a preferred provider organization (PPO) in which enrollees select an EPO provider to act as their primary care physician and serve as the gatekeeper. This ...
Same as term Contribution: principle of equity in property, casualty, and health insurance. When two or more policies apply to the loss, each policy pays its part of the loss, unless its ...
Group coverage for members of a fraternal association, usually on a nonprofit basis. ...
System of charges to an insured that fluctuates according to the loss experience of that insured. This is a form of experience rating. ...
Correction of a contract containing a mistake in order to prevent a party to that contract from gaining from that mistake. For example, if $1,000,000, instead of the correct amount of ...
Statute that makes it illegal in most states for an agent to rebate (return) any portion of his commission as an inducement for an applicant to purchase insurance from him. ...
Total amount of commissions and expense allowances paid by the reinsurer to its ceding company minus the total amount of reinsurance commissions and expense allowances that, in turn, its ...
Commission that is paid based on how profitable a particular type of business proves to be that is written by an agent. ...
Have a question or comment?
We're here to help.