6.6.Backgroung - Risk Load
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Std dev and var-based risk loads
- Use σ of loss dist and calculates risk load as a multiple
- - reflects process risks but not parameter risk
- Assume utility function that is relevant for the insr and then establish the premium so that U(w/risk) = U(w/o risk)
- - lack of guidance as to the appropriate U(x)
- - fails to distinguish btwn process and parameter risk
Probability of ruin as risk load method
- Assumes ins has target, and solves for premium
- - no "right" target prob or ruin
- - only provides relative risk load
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