Insurance Terms Defined: Law of Large Numbers

Law of Large Numbers: a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) based on these exposure units also increases.

This is a mathematical principle that your auto insurance company uses to help them determine how many losses they may pay based on their clientele.  As you can see, the general theory is that the more people they have in like situations based on data gathered the more accurate they can predict the future outcomes of loss situations.

With this information your auto insurance company will try to decide just how many people they want from a certain loss exposure situation and how much they will charge those people.  This is one of the most fundamental parts of the auto insurance industry and will help anyone understand how the business works.