Insurance is about covering risks and not certainties. But even while covering an uncertain event, it is important for the insurer to know the probability of that risk actually becoming a reality, to be able to price the product right. Insurers rely on the law of large numbers to predict the risks.
Large numbers in real life
According to this law, the average of the results obtained from a large number of trials will move closer to the expected result as more and more trials are performed. Let’s explain this through a popular example. When you flip a coin, the chances of it landing head upwards are 50%, as the coin has two sides and it could show either head or tail. By this logic, a person flipping a coin six times should get tails at least three times, but when a coin is flipped just six times, the person may get five tails in a row.
