An insurer that writes 60,000 similar small commercial buildings predicts its yearly fire losses far more closely than one writing 600. The reason is:
Explanation
The law of large numbers says that as the number of similar, independent exposure units grows, actual results move closer to the predicted results, which is what lets an insurer price a class. Adverse selection describes who buys coverage, not how accurately losses can be forecast. Indemnity limits recovery to the amount of loss and has nothing to do with forecasting accuracy.
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