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Principles of Risk Management and Insurance, 13th Edition by Michael McNamara, George E. Rejda

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Appendix Basic Statistics and the Law of Large Numbers

The application of probability and statistics is crucial in the insurance industry. Insurance actuaries constantly face a tradeoff when determining the premium to charge for coverage: The premium must be high enough to cover expected losses and expenses, but low enough to remain competitive with premiums charged by other insurers. Actuaries apply statistical analysis to determine expected loss levels and expected deviations from these loss levels. Through the application of the law of large numbers, insurers reduce their risk of adverse outcomes.

In this appendix, we review some statistical concepts that are important to insurers, including probability, central tendency, and dispersion. Next, ...

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