ERM - Lesson 3 Flashcards
Have an interest in making informed estimates of the likely impact of losses in a budget year
Economic Entities
2 key pieces of data for informed estimates
- Mean frequency
- Severity of losses
Because __________ are random variables, some basic statistical concepts can be employed in making estimates of frequency and severity.
Losses
Beginning step
Construction of probability distributions from data on losses.
The construction of confidence intervals
around estimated means allows decisions about maximum risk to be handled by the firm. This technique is used by ________ in setting reinsurance requirements and is used by _______ to set limits on the amounts of risk that they will bear.
Insurance Companies
Self Insurers
The 2 key task is to estimate the financial impact of losses.
- Trying to gauge loss experience, so that budget decisions can be made
- Estimating frequency and severity
Two key statistical measures
- Frequency with which losses occur
- Their severity
4 Basic Statistical Concepts
- Random variables
- Probability distributions
- Expected value
- Variance and standard deviation
Probability distributions is based on _______ data.
Empirical or a Priori data
Frequency times Severity
Expected value
Average values come from __________ data.
Historical Data
A process of charting all possible combinations of frequency and severity to establish the probable maximum loss.
Convolution
Future value is not known with certainty.
Random Variable
Shows all possible outcomes for a Random Variable.
Probability Distribution
Sum of the multiplication of each possible outcome of the variable with its probability.
Expected Value
The _______ the dispersion, the higher the risk
Wider
The _______ the dispersion, the lower the risk
Narrow
Is a measurement of risk
Standard Deviation
Another measurement of risk aside from standard deviation
Data
There is losses and gain in _______
Stock Investment
Standard Deviation of _______
Returns
Can be calculated by multiplying the expected losses with their probability and calculating the sum of all outcomes.
Expected Value
Is a starting point for calculating an insurance premium or how much a firm should set aside each year to cover the losses.
Expected Value
Formula for Estimating Loss Frequency
Total Amount of Losses / by Total Number of Accidents
Formula for Loss Severity
Total Number of Accidents / by Total Units Analyzed
Formula for Average Loss
Average Loss Frequency x Average Loss Severity
Used in day-to-day
Working Capital or Revolving Capital
Working Capital or Revolving Capital is placed in what type of investment?
Short-term investment
Short-term investment is also called as? Meaning it is easy to pull out.
Money Market
The _____________ the standard deviation the better
Lower
Is the margin for error (in the estimated distribution).
Risk Charge
Formula for Confidence Interval
Estimated mean +/– k standard deviations
2 Practical considerations in Using Risk Pooling
1.Insurers
2. Self-insurers
Specified number of standard deviations which reflect the uncertainty.
(k)
