Chapter 4 Flashcards
priori probability
Where you can easily deduce probability in advance
example: coin flip or rolling dice
requirements for priori probability
All outcomes are known, mutually exclusive, and equally likely
statistical probability
Make an estimate based on the stats and post data by running data or doing an experiment
Law of large numbers
The more data you collect the closer you get to an accurate result
Random Variable
The outcome depends on some chance event
measure of central tendency
mean, median , mode
mean
What we expect, expected value
measures of dispersion
how good is your guess
example: variance, coefficient of variance
maximum probable loss
The largest loss you find reasonable, not one correct answer based on belief of largest loss you think will occur
gross premium
3 components
1. pure premium
2. risk charge
3. admin cost
pure premium
A guess by the insurance company of what loss will be
maybe wrong, it has to be estimated in advance
guesses
if the guess is right, they break even
if the actual loss is less than expected= profit
if the actual loss is greater than expected=loss
risk charge
the estimation of risk of the insurer
added to the guess for safety
influenced by accuracy and confidence
example: lots of past info
confident in estimate, little estimation risk
example: homeowner and life insurance
example: not a lot of past info
lots of estimation risk
example: terrorism, Olympics, space
lyods of london
