Questions: Why does the pooling of risk lead to an overall reduction of risk in society? As the severity of exposures increases insurers' accuracy of prediction improves, reducing the overall risk. Insureds' risk appetite decreases as the severity of exposures increases, thus reducing overall risk. Insureds' anxiety of risk decreases as the number of exposures increases. As the number of exposures increases insurers' accuracy of prediction improves, reducing the overall risk. Insureds' attitude towards risk changes as the number of insurers increases.

The answer is: As the number of exposures increases, insurers' accuracy of prediction improves, reducing the overall risk.

This option is incorrect because the severity of exposures does not necessarily improve the accuracy of prediction. Severity refers to the potential magnitude of a loss, and while it is an important factor in underwriting, it does not directly enhance predictive accuracy.

This option is incorrect because a decrease in risk appetite does not inherently reduce overall risk. It may lead to more cautious behavior, but it does not affect the fundamental risk pooling mechanism that insurers use to manage risk.

This option is incorrect because the anxiety of insureds is not directly related to the pooling of risk. While having insurance might reduce individual anxiety, it is not the mechanism by which risk is reduced in society.

This option is correct. The law of large numbers states that as the number of exposure units increases, the actual results will more closely approximate expected results. This allows insurers to predict losses more accurately and set premiums that reflect the true level of risk, thereby reducing the overall risk in society.

This option is incorrect because the number of insurers does not directly affect insureds' attitudes towards risk. While competition among insurers might influence pricing and coverage options, it does not change the fundamental risk pooling process.