What is a key purpose of having a large number of homogeneous units in insurance?

Having a large number of homogeneous units in insurance primarily serves to aid in pooling and sharing mechanisms. This concept is fundamental to how insurance operates, as it allows for the distribution of risk across a broad base of policyholders.

When a large group of similar units (like individuals or properties that share similar risk characteristics) is insured together, the insurer can pool the resources and payouts from those who may not experience a claim with those who do. This collective approach helps to stabilize premiums and ensures that the insurer can cover the losses of the few who do claim without drastically increasing costs for all insured.

Additionally, by having a homogeneous group, actuaries can more accurately assess risk and set premiums that reflect the collective risk more precisely. This leads to a more sustainable insurance model where everyone in the pool benefits from more predictable outcomes.

In contrast, predicting individual risk levels focuses more on personalized assessments, which can be challenging with diverse units. Reducing premiums for high-risk individuals is generally a result of risk mitigation strategies rather than the pooling concept. Lastly, while ensuring profit margins is certainly a concern for insurers, it is not a core purpose of having homogeneous units; rather, it is a byproduct of effectively managing risk through escalation and pooling strategies.