So far, we've made a large simplification.

We've looked at insurance business on the basis of a single policy. But in reality, insurance companies write millions of policies covering similar risks every day.

In fact, this is an important element of insurance. But why is this? Well, by writing lots of similar policies, it allows the insurance company to manage and diversify its risk across a whole portfolio. This means that if, say, one customer makes an unexpectedly large claim, this might be mitigated by another customer making a claim below the expected claim level.

The insurance company can use historic data and statistical techniques to predict the amount of future claims across the portfolio of policies as accurately as possible.

However, it's important to note that these estimates are based on a number of assumptions. They can't know with certainty what the future claims will be for a particular portfolio.

A further important point to note is that even if an insurance policy covers a period of, say, one year, it is likely that claims will continue to arise even after the end of the coverage period.

This is because it can take some time for insurance companies to be notified of the claims or for the claims to be assessed.

Insurance companies therefore use historic data to build an expectation of development of claims over time.

Hopefully, all of this has highlighted to you that an insurance company's reliance on assumptions and estimates is a key part of what makes the industry different to others. The people involved in calculating and estimating future claims are actuaries.