The Law of Large Numbers is used to help determine what?

The Law of Large Numbers is a fundamental principle in the field of insurance and risk management. It states that as the number of exposure units increases, the actual loss experience will more closely approximate the expected loss experience. This means that insurers can predict the average loss more accurately when they have a larger pool of similar risks to draw data from.

The correct answer relates to how the Law of Large Numbers helps insurers estimate the average loss a policyholder can expect, not just a maximum payout for any single loss. Insurance works on the principle of pooling risks and, through this, the Law of Large Numbers enables the insurer to assess the collective risk and thereby determine what a policyholder may typically expect as a loss over time.

In contrast, maximum payout is determined by individual policy limits rather than a statistical average, while the number of claims and frequency of policy renewals are indirect results of assessing risks and losses rather than direct applications of the Law of Large Numbers.