According to the law of large numbers, how would losses be affected if the number of similar insured units increases?

The law of large numbers states that as the number of similar insured units increases, the outcomes become more predictable. This principle is fundamental in the field of insurance, as it assures that with a larger sample size, the actual loss experience will tend to approach the expected loss.

When there is a greater number of similar insured units, the variations in individual loss experiences tend to cancel each other out. For example, if an insurance provider has a large pool of insured individuals, the prediction of total losses becomes more accurate because it averages out the random fluctuations in loss occurrences.

In contrast, with a smaller number of insured units, the results can be much more volatile and harder to predict due to the disproportionate impact of any single claim. Thus, increasing the number of insured units enhances the insurer's ability to foresee and manage potential losses effectively, leading to improved predictability. This allows insurance companies to set premiums appropriately and maintain financial stability.