What does the Law of Large Numbers state regarding insurance?

The Law of Large Numbers is a fundamental principle in insurance that states as the number of exposure units (such as insured items or people) increases, the actual loss experience will converge on the expected loss experience. This means that with a larger group of insured entities, insurers can predict future losses more accurately, allowing for more reliable premium pricing and risk assessment.

When there is an adequate spread of risk, it reduces the likelihood that a single event will significantly impact the financial stability of the insurer. Insurers rely on having a diverse portfolio of policies covering different risks and exposures, which ensures that the collective losses do not exceed the reserves set aside for claims. This spreading of risk helps maintain the balance between premiums collected and claims paid, thereby ensuring the sustainability of the insurance company over time.

The other options do not accurately reflect the core of the Law of Large Numbers. While terms of policies may encompass various complexities, they are not a direct requirement of the Law itself. Affordability and claims processing speed, while important aspects of insurance as a product and service, do not relate to the statistical mechanism that underpins risk assessment and ensuring accurate loss predictions as highlighted by the Law of Large Numbers.