What is the effect of increasing the number of people in an insurance risk pool?

Increasing the number of people in an insurance risk pool affects the predictability of losses. With a larger pool, the total number of insured individuals leads to a greater distribution of risk. This phenomenon is often referred to as the law of large numbers, which states that as the sample size increases, the actual loss experience will more closely align with the expected loss. Therefore, the average losses per individual become more predictable since they tend to smooth out the variability caused by individual claims.

For example, with more participants, the likelihood of extreme events occurring simultaneously diminishes, as each individual's risk is diluted across the entire pool. Consequently, insurers can set premiums based on more accurate statistical models, reducing uncertainty.

This increased predictability enables insurers to better anticipate future claims, allowing for more stable pricing strategies and risk management approaches. Hence, more extensive risk pools lead to more predictable outcomes regarding losses.