Question

JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?a. The total number of claims filled by JKL policy owners should decrease.b. The total dollar value of claims will decrease.c. The average size of loss will decline in value.d. The actual results will more closely approach the expected results.

Answer 1

Answer:

The answer is: D) The actual results will more closely approach the expected results.

Explanation:

The Law of Large Numbers is a principle or probability that states that as the number of events (home insurance policies) increases, the actual ratio of outcomes tend to converge with the expected ratio of outcomes (14% of homeowners filing a claim per year).

So if JKL Insurance Company issues 2,000 home policies this year, they should expect that 280 homeowners will file a claim for this year.