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[X i ] and Var[X i ] for each group of policies and then add them together to find the E[S] and Var[S] of the whole portfolio

Normal Approximation to Aggregate Claims Find the __ th percentile of aggregate claims Normal table is given on the exam These questions “come up frequently”

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