RISK MANAGEMENT 2
1. Law of large numbers
Law of large numbers is defined as the insurance company that produces its axiom.
Therefore, as the number of policyholders and exposure units rise, there are raised chances that
the experienced actual loss incurred in exposure will also equal the amount of expected
exposure. However, in the real world, the law of large numbers does not hold up. In statistics, the
law of large numbers emerges and it’s applied in the current expectation policies. The law
proposes that when there is an increase in the number of observations, the total means carried
around decreases (Arthur, 2018). Therefore, the average value increases the number of expected
power.
2. How is insurance different from gambling?
Insurance is defined as the price which is paid to an organization or someone so that the
risks that would have been encountered are transferred. Additionally, insurance is described as a
form of managing expected risks. Insured people pool their resources so that they can be able to
replace the kind of anticipated losses from various events. On the side of insurance, one expected
a certain amount of damage to take place amongst a particular group of people. Gambling, on the
other hand, is defined as the price payment which is made so that there is a potential form of
gain. On the other side, in gambling one is not keen on replacing the expected losses or having a
trial of increasing wealth. Additionally, in gambling, there are no chances of reducing the likely
losses. The participant does not have the opportunity of sharing the failures with other people
(Stulz, 2015).
