North Carolina Adjuster Practice Exam

In the context of loss prediction, what does "insuring a greater number of units" assist with?

1. Decreasing premiums

2. Increased market risk

3. Improving prediction accuracy for losses

4. Reducing underinsurance

The correct answer is: Improving prediction accuracy for losses

Insuring a greater number of units enhances the ability to improve prediction accuracy for losses because it allows for a more extensive data set to analyze trends and patterns related to loss experiences. When there are more units insured, the law of large numbers comes into play, which states that as the number of exposures increases, the predictability of losses improves. This larger sample size provides better statistical information, allowing insurers to more accurately estimate potential losses based on historical data. In addition to improving accuracy, insuring more units can help identify less predictable extremes, like catastrophic events, making it easier to create more informed risk assessments. This improved understanding ultimately supports better pricing strategies for policies and aids in reserve setting. Overall, this aspect of insuring a greater number of units is essential for actuaries and insurance professionals in managing risk effectively.