Confronting Uncertainty – CRAIN’S COMMENTS

This perhaps is the jarring lesson of COVID — nothing in life is certain, including death and taxes. Will you wake up tomorrow? Or will you wake up in a hospital bed with a tube jammed down your throat?

Frankly, you don’t know the answer to those questions. If you think you do, you’re lying to yourself.

The insurance industry hates uncertainty. That’s why they think in terms of groups, not individuals, and rely on the Central Limit Theorem to make accurate projections of risk. The CLT simply says that the larger the group, the closer any estimate will be to the “true” result. Underwriters want to calculate risk as finely as possible to estimate expected loss payouts, and then price policies to make their target profit margin. When they can’t calculate risk, the reaction is close to panic.

Source: Confronting Uncertainty – CRAIN’S COMMENTS