Section 10 – Risk Management Concepts. Learning this Material This chapter is not very technical,...
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Transcript of Section 10 – Risk Management Concepts. Learning this Material This chapter is not very technical,...
Section 10 – Risk Management Concepts
Learning this Material
• This chapter is not very technical, it’s all about insurance concepts
• INS 301 covers a lot of this material• This chapter in Actex in particular is very
readable• Make sure you work examples so you’re sure
you know how the material is applied
Insurance Basics
• Insurance is a contract between the policyholder/insured and the insurer
• Policyholder pays a premium to the insurer• Insurer will reimburse certain claims to the
policyholder– A claim is all or part of the loss, depending on the
contract
Modeling a Loss RV
• X is the loss• E[X] is called the pure premium or expected
claim• Coefficient of Variation:
(unitized risk)
Deductible Insurance
• Deductible Amount: d• Insurer pays nothing if the loss < d• Insurer pays only the loss in excess of the
deductible• Let Y = payout
Y = 0 for X<=d Y = X-d for X>d
• See Actex p312 for more on special cases (Franchise deductible & Disappearing deductible)
Policy Limit
• The insurer will only pay claims up to the policy limit
• Policy limit amount: u• Let Y = payout
Y = X if X<=u Y = u if X>u
Individual Risk Model
• Find the E[Xi] and Var[Xi] for each group of policies and then add them together to find the E[S] and Var[S] of the whole portfolio
S X ii1
n
E[S] E[X ii1
n
]
Var[S] Var[X i]i1
n
Normal Approximation to Aggregate Claims
• Find the __th percentile of aggregate claims• Normal table is given on the exam• These questions “come up frequently”
P[S Q]__(percentile)P[Z z]where :
zQ E[S]Var[S]
Mixture of Loss Distributions
• This concept was covered in the chapter 9 slides
• Often applied to insurance policies – Consider a portfolio of low, medium and high risk
policies with different means and variances for losses