Question

Suppose that an insurance company insures more than one million individuals with a policy that the company actuaries eve will net them an average profit of $20 per month per policy (total premiums collected minus payouts for claims and overhead, divided by the number of such policies that they carry). Assume that total dollar amount of claims each month varies randomly the statements do not accurately reflect the meaning of the law of large numbers. As more months go by, the average profit per policy gets closer to $20. In one particular month, the policies resulted in a profit of $30 per policy. Therefore, the next month is likely to show a net loss of $10 per policy In one particular month, the policies resulted in a net loss of $15 per policy. Therefore, the next month is likely to show a net profit of $35 per policy. The company will show a profit of $20 per policy every single month. In one particular month, the policies resulted in a net profit of $50 per policy. Therefore, the company must have been selling the policies for a very large number of months.

Answer 1