Chapter 2: Apendix Flashcards

1
Q

How to compute expected value?

A

Loss %1 * Amount of Loss 1 + Loss %2 * Amount of loss 2โ€ฆ.

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2
Q

What does standard deviation mean in regards to uncertainty of loss?

A

The greater the standard deviation, the greater uncertainty of loss.

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3
Q

How to calculate standard deviation?

A

(Amount of Loss1 - Amount of Loss 1)^2 (Probability of Loss1) + (Amount of Loss2 - Amount of Loss2)^2 (Probability of Loss2)โ€ฆ..= variance, Sqrt = SD

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4
Q

What does the central limit theorem state?

A

The distribution of the sample mean will approach the normal distribution as the sample size increases

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5
Q

What are the three probability distributions?

A
  1. Binomial
  2. Normal
  3. Poisson
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6
Q

When do you use the binomial probability distribution?

A
  • Requires discrete variables (loss or no loss)
  • Small number exposures
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7
Q

When do you use the normal probability distribution?

A
  • Normal
  • More versatile
  • More realistic
  • Small number exposures
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8
Q

When do you use the poisson probability distribution?

A

Use if exposure units are over 50 and probability of loss is very small

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9
Q

In a normal probability distribution losses are arranged as:

A
  • 68% of all losses will be within 1 standard deviation of the mean
  • 95% of all losses will be within 2 standard deviations of the mean
  • 99% of all losses will be within 3 standard deviations of the mean
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10
Q

In binomial distribution what outcomes exist?

A

Loss or no loss

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11
Q

How to calculate mean for binomial distribution?

A

n x p = mean

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12
Q

What does the standard deviation of a binomial distribution measure?

A

risk or dispersion. For a binomial distribution, the standard deviation is, calculated by SQRT of N X P X Q

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13
Q

What is underwriting risk?

A

When an insurance company increases the size of the sample insured, underwriting risk (maximum insured loss) increase because more insured exposure units could suffer a loss.

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14
Q

How to calculate underwriting risk?

A
  • Underwriting Risk = # of units insured x standard error of the avg. loss distribution
  • n x ๐œŽ๐‘ฅ or โˆš๐‘›x ๐œŽx

n = # of units insured
๐œŽ๐‘ฅ = standard error of a distribution
๐œŽ๐‘ฅ = standard deviation of losses

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15
Q

In a hard market how do underwriters act?

A
  • Insurance companies raise their premiums or less coverage for the same premium
  • More โ€œconservativeโ€ in their underwriting
  • Restricted contract provisions
  • September 11 resulted in a hard market (large losses & bad investment returns
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16
Q

In a soft market how do underwriters act?

A
  • Insurance companies lower premiums
  • More โ€œliberalโ€ underwriting
  • Investment earnings exceed underwriting losses
  • Deductibles are lower and contract terms are more attractive
17
Q

What is an example of a soft market insurance?

A

Life insurance

18
Q

What is an example of a hard market insurance?

A

Directors and officerโ€™s liability insurance