Property and Casualty Insurance Practice Exam

What does the Law of Large Numbers primarily aim to enhance in statistics?

1. Reliability of the statistic

2. Speed of data collection

3. Complexity of analysis

4. Amount of data processed

The correct answer is: Reliability of the statistic

The Law of Large Numbers is a fundamental principle in statistics that states that as the size of a sample increases, the sample mean will get closer to the expected value, or population mean. This principle ensures that the results drawn from larger samples are more reliable and stable, reducing the impact of anomalies or outliers present in smaller samples. When applied in the context of insurance, for example, it allows insurers to predict future claims and risks with greater accuracy based on the experiences of a larger pool of insured individuals. This reliability is crucial for setting premiums and making informed business decisions. The larger the data set, the more it reflects the true characteristics of the population, leading to better predictions and greater confidence in the statistical findings. The other options address aspects that are not primarily enhanced by the Law of Large Numbers. Enhancing the speed of data collection, increasing the complexity of analysis, or merely processing larger amounts of data does not directly relate to the reliability of the statistical outcomes, which is at the core of what the Law of Large Numbers aims to achieve.