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Risk management application problems
1. Chapter 4 Appendix
RiskManagement
Application
Problems
Copyright © 2011 Pearson Prentice Hall. All rights reserved.
2. Loss Forecasting
• Probability distributions commonly used inloss forecasting include:
–
–
–
–
Normal
Binomial
Exponential
Poisson
• The normal distribution is used in many
situations
Copyright © 2011 Pearson Prentice Hall. All rights reserved.
4A-2
3. Exhibit A4.1 Areas Under the Normal Curve (One Tail)
Copyright © 2011 Pearson Prentice Hall. All rights reserved.4A-3
4. Time Value of Money
• When decisions involve consideration ofcash flows over time, the interest-earning
capacity of money must be taken into
account
Copyright © 2011 Pearson Prentice Hall. All rights reserved.
4A-4
5. Other Risk Management Applications
• An accurate forecast of the timing and magnitudeof claims is especially important when losses are
retained
• The ability to forecast ultimate claims for liability
lines is an important skill for the risk manager
– Loss development factors are multipliers that can be
applied to claims settled to date to estimate the ultimate
claims for a period
• When pricing catastrophe bonds, the probability of
various loss contingencies must be considered
Copyright © 2011 Pearson Prentice Hall. All rights reserved.
4A-5