What is the focus of the Law of Large Numbers in risk assessment?

The focus of the Law of Large Numbers in risk assessment is increased accuracy in predictions. This principle states that as the number of exposure units increases, the actual results will more closely approach the expected results. In other words, when dealing with large groups or populations, insurers can predict outcomes more reliably, which leads to better underwriting decisions and pricing strategies.

This law is crucial for insurance companies because it allows them to estimate the likelihood of claims based on historical data. For instance, a larger pool of policyholders provides a more stable and predictable loss experience, enabling insurers to set premiums that reflect the true risk. Consequently, the accuracy of predictions regarding claims and losses improves, allowing for more effective risk management and financial stability for the insurer.

Other options like reduction of costs, minimization of premiums, and legal constraints, while important in the broader picture of insurance and risk management, do not directly align with the core purpose of the Law of Large Numbers, which is fundamentally about enhancing predictive accuracy through the analysis of larger datasets.