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Law of Large Numbers

By August 24, 2018January 5th, 2021Insurance

When you think of insurance as a financial product how big do you imagine? Or put another way, how many people do you imagine when you think of insurance?

While your individual rate factors in your information, insurance carrier rates as a whole are based on the group. There is a statistical term called the “Law of Large Numbers” that you may or may not be familiar with. It simply states that “as a sample size grows, its mean gets closer to the average of the whole population.

For example, say we wanted to find the statistical probably on whether individuals in Blacksburg, Va prefer either pie or cake. Now, we could simply monitor the most popular restaurant in Blacksburg and tally the orders for each group. However, a more accurate measure would be to monitor the twenty most popular restaurants and then tally the results. An even more accurate measure would be to monitor every restaurant. In other words, the more data the better.

So how can this apply to insurance? Generally speaking there are a number of ways this can impact insurance rates, but it does vary from carrier to carrier, state to state. California is currently seeing major losses from devastating fires. If Insurance Company A insures a large number of homes in these fire struck areas, when the homes are rebuilt and bills paid, will home rates for this company need adjusting? Probably so.

The truth is that insurance is a constantly evolving financial product. State laws change, insurance carriers change target markets or simply adjust their products. Loss severity can unexpectedly arise. These are just a few of the issues that can impact insurance.

This is why working with our Family of Independent Agents works toward your benefit. Instead of representing just one insurance company, we work with multiple carriers to find you the best fit for your needs. And you’ll get your insurance questions answered by experienced, local agents. No call centers. No random employees. Simple one-on-one discussions.

Dove Insurance Agency is also a Dave Ramsey Endorsed Local Provider (ELP).