Lecture Risk management and insurance - Lecture No 8: Advanced topics in risk management. In this chapter, the learning objectives are: Probability distribution, application in risk management & insurance, insurance premium, using probabilistic approach. | Advanced Topics in Risk Management Lecture No. 8 1 Objectives Probability Distribution Application in Risk Management & Insurance Insurance Premium Using Probabilistic Approach Probability Distribution Representations of all possible events along with their associated probabilities Example; Total number of points rolled with a pair of dice. Outcome Probability 2 1/36 3 2/36 4 3/36 5 4/36 6 5/36 7 6/36 8 5/36 9 4/36 10 3/36 11 2/36 12 1/36 Different Events Mutually exclusive (events) The probability of two mutually exclusive events occurring at the same time is _ . Collectively exhaustive (events) Independent (events) Probability Distribution Measure of central tendency Mean, Median, Mode Measure of variability (risk) Difference (Min, Max) Variance Standard deviation Coefficient of variation “Unitless” measure Probability Distribution Insurance Premium Gross premium = Pure premium + Risk charge + Other loadings Pure premium = Expected Loss (EL) = Expected Frequency x Expected . | Advanced Topics in Risk Management Lecture No. 8 1 Objectives Probability Distribution Application in Risk Management & Insurance Insurance Premium Using Probabilistic Approach Probability Distribution Representations of all possible events along with their associated probabilities Example; Total number of points rolled with a pair of dice. Outcome Probability 2 1/36 3 2/36 4 3/36 5 4/36 6 5/36 7 6/36 8 5/36 9 4/36 10 3/36 11 2/36 12 1/36 Different Events Mutually exclusive (events) The probability of two mutually exclusive events occurring at the same time is _ . Collectively exhaustive (events) Independent (events) Probability Distribution Measure of central tendency Mean, Median, Mode Measure of variability (risk) Difference (Min, Max) Variance Standard deviation Coefficient of variation “Unitless” measure Probability Distribution Insurance Premium Gross premium = Pure premium + Risk charge + Other loadings Pure premium = Expected Loss (EL) = Expected Frequency x Expected Severity Estimated amount to pay for expected loss. Risk charge (Risk loading) Amount to cover the risk that actual loss may be higher than expected loss Other Loadings Expenses and profits Risk Charge (Risk Loading) What determines the size/magnitude of the risk charge? Amount of available past information to estimate EL The level of confidence in the estimated EL. The higher the level of confidence in the estimated EL, the _ the risk charge. The number of loss exposures insured by the insurer The size of loss exposures Risk charge for terrorism coverage would be _ than that for personal automobile insurance. Probabilistic Risk Analysis Simple example of event tree What is the expected severity of a fire? $19,990 Probabilistic Risk Analysis What if there is no sprinkler system What is the expected severity of a fire? $1,009,000 11 Executor Fund When a person dies, there are some immediate expenses associated with the funeral and burial or other disposition of the body These .
