What effect does insuring a large number of similar risks have?

Insuring a large number of similar risks has the effect of reducing variability in expected claims because it allows insurers to pool risks together. This principle is often referred to as the law of large numbers. When a large sample of risks is grouped together, individual variations in claims tend to balance out across the group. Consequently, insurers can predict the overall loss experience more accurately and set premiums that are more reflective of the expected losses.

By reducing variability, insurers can create a more stable environment for managing claims, allowing them to anticipate the frequency and severity of claims with greater confidence. This leads to more reliable financial planning and pricing strategies, ultimately benefiting both the insurer and the insured by creating a more consistent market for insurance coverage.