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What does P* stand for?
Short hand notation for expected losses.

What is step 2 of the rm process?
objectively measure risk

Amount of losses in a given time period is an example of a______.
random variable

Exposure unit
Item, person, thing of value exposed to a loss.

Ex. What formula would you use tocalculate p* for a group of "similar drivers"?
 sum of all losses
 # of drivers

What was the expected loss for the whole class (car accidents)?
258.28

How to calculate P* for a single exposure unit. (ex p* for a single driver)
 sum of all losses
 # of years

Gross premium
A premium paid per unit of coverage to insure a particular risk. aka "price for a product"

What are the basis of insurance company pricing decisions?
expected losses

What two things make up a gross premium?
 1 admin costs
 2 losses/claims (interchangable claims)

What is the formula for gross premium?
pure premium(P*)+risk charge+administrative costs

Pure premium
Amount of portion of the gross premium which is calculated as being sufficient to pay for losses only.(P*)

To calculate pure premium what must be estimated in advance?
P*. (and that estimate may be wrong)

(break even,profit or loss)Al=EL
Break even

(break even,profit or loss)AL>EL
loss

(break even,profit or loss)AL<EL
profit

Risk charge
Reflects the estimation risk of the insurer. It is the extra amount charged by the insurer to represent the estimation risk.

What influences the size/magnitude of the risk charge?(2)
 The accuracy of the estimate of P*
 The level of confidence in the estimate of P*.

What do insurers have lots of past information of to help estimate P* accurately?
There is a lot of data to help predict P* for property,auto,and life insurance.

When estimation risk is low insurers are?
 very confident in the estimate of P*
 and there is a very low need for a risk charge

What are some examples of risks that do not have a lot of past information, and therefore have a high estimation risk.
terrorism,event risk, cyber risk

When there is a lot of estimation risk there is:
A high need for a risk charge because P* is really an educated guess

What is an example of a company that deals primarily with event risk?
LLoyds of london

_____ varies inversely with the level of confidence in the estimate of P*
Risk charge

What are some examples of administrative costs?
 stake premium taxes
 mktg and advertising
 wages and compensation for employees

What is another term for administrative costs?
expense loading

mutually exclusive
two events that cannot occur at the same time.

random variable
A variable whose outcome or value depends on some chance event.

fair coin
all outcomes equally as likely

unfair coin
All outcomes are not equally likely

probability distribution
Table/graph that indicates for each outcome of a random variable the probability of that particular outcome.

another word for the mean is the
expected value

how to calculate the mean
weighted average

What are some measures of dispersion
 1.variance
 2.std deviation
 3. coefficient of variation

What are the 2 things needed to calculate variance?
 1.outcomes of a random variable
 2.prob of the outcomes

std deviation formula
take the square root of the variance

what are the 4 columns needed to calculate variance within a table
 1. outcomes
 2. mean
 3. outcomemean
 4. (outcomemean^2
 5. probability
 6. 4*5


coefficient of variation
 can be defined as how much risk is present
 who faces the most risk
 and can you quantify the risk

When do you need to calculate when you use the means are different?
the coefficient of variation

e(f)
expected value of frequency(gotten by using a probability distribution)

e(s)
expected value of severity
 total dollar losses
 total # losses

expected loss per___ formula
 total dollar losses
 total # of ______.

a priori probability
 deduce in advance based on the nature of the event.
 (ex outcome of tossing a fair coin once)

What are the 3 assumptions in a priori probability
 1. all possible outcomes are known
 2. all outcomes are mutually exclusive
 3. all outcomes are equally likely

Are statistical or a priori probabilities more common?
statistical

statistical probability
looking at past information to estimate

maximum probably loss
largest loss that could occur with a very high probability

theoretical probability
probability based on theoretical principles rather than on actual experience.

empirical probability
based on actual experience through historical or from the observation of facts.

alternative probability
the probability that any one of two or more events will occur within a given period.

premium base
The unit in which the exposure is measured, such as gross sales or payroll.

homogenous
Units of exposure that face approximately the same expected severity and frequency of loss.

premium base
The unit in which the exposure is measured such as gross sales or payroll

amount subject
the total value exposed to loss at any one location from any one event.

reinsurance
The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium to indemnify another (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.

Measurement
and Evaluation of Exposures to Loss
step 2 in the rm process

