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Aggregate Risk Management Models Explained

The document discusses aggregate risk models used to estimate total loss or claims over a specified period by combining the number of claims and the amount of each claim. It outlines two types of risk models: the Individual Risk Model, which sums fixed losses from contracts, and the Collective Risk Model, which considers a random number of claims. An example illustrates the calculation of aggregate losses for both models, resulting in the same total of 60.

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3 views9 pages

Aggregate Risk Management Models Explained

The document discusses aggregate risk models used to estimate total loss or claims over a specified period by combining the number of claims and the amount of each claim. It outlines two types of risk models: the Individual Risk Model, which sums fixed losses from contracts, and the Collective Risk Model, which considers a random number of claims. An example illustrates the calculation of aggregate losses for both models, resulting in the same total of 60.

Uploaded by

soostutimilsina
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Aggregate Risk

Management
Aggregate Risk Models
An aggregate risk model is a probabilistic model used to estimate the
total loss or total claim amount over a specified period (such as a year)
or on a defined set of insurance contracts, by combining:
The number of claims (or events), and
The amount of each individual claim
Risk Models
Individual Risk Model
Record losses for each contract and then add them up
Collective Risk Model
Record losses as claims are made and then add them up
Individual Risk Model
The individual risk model represents the aggregate loss as a sum
of a fixed number of insurance contracts

where
• denotes the aggregate loss for n (a fixed number) contracts
• denotes the loss for the ith contract for
• are assumed to independent but are not necessarily identically
distributed, due to different coverage or exposure
• usually has a probability mass at zero
Collective Risk Model
The collective risk model has representation

with S being the aggregate loss of N (a random number) individual


claims
Key assumptions
• Conditional on are i.i.d. random variables
• The distribution of N and the common distribution of X are
independent of each other.
Two building blocks: frequency N and severity X
Example:
Policy ID Claim ID Loss
Amount
1 - -
2 1 10
3 1 10
3 2 10
4 1 10
4 2 10
4 3 10
Aggregate losses:
• Individual Risk Model: 0 + 10 + 20 + 30 = 60
• Collective Risk Model: 10 + 10 + 10 + 10 + 10 + 10 =
60
Compound Poisson Approximation
for Individual Risk Model
Swedish Motor Dataset

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