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Insurance & Risk Management
3. Chapter 2 Appendix: Basic Statistics and the Law of Large Numbers/Law of Large Numbers
3. Chapter 2 Appendix: Basic Statistics and the Law of Large Numbers Illustration
Syllabus Slides

Law of Large Numbers

01.Core Concepts

The law of large numbers is the mathematical foundation of insurance. Average losses for a random sample of n exposure units will follow a normal distribution because of the Central Limit Theorem. Regardless of the population distribution, the distribution of sample means will approach the normal distribution as the sample size increases. The standard error of the sampling distribution can be reduced by increasing the sample size