Spreading loss exposures across a large number of similar exposure units within the same period primarily helps to

• A. Increase premiums
• B. Reduce the variance of losses
• C. Eliminate all losses
• D. Create more risk concentration

Answer: (B)

Diversification across many similar exposure units relies on the idea that many small, independent losses tend to even out. As more units are included, the random fluctuations in losses from individual units cancel each other out, so the total losses for the period become more predictable. This reduces the variability (variance) of losses when you look at the aggregate across all units, making losses closer to the expected value. That clearer predictability is exactly why spreading exposures helps. It doesn’t guarantee no losses, and it doesn’t intentionally raise premiums or create more risk concentration; it lowers the chance that the total losses swing wildly.