Risk Identification and Analysis Flashcards

A company's earthquake exposure produces an expected loss of $50,000 per year. How is expected loss calculated?

Answer: Frequency multiplied by severity

Expected loss (expected value) equals the average number of losses times the average size of each loss.

Which type of probability is derived from analyzing past loss data rather than from theory?

Answer: Empirical probability

Empirical (a posteriori) probability is estimated from observed historical data.

When analyzing loss data, why is it important to adjust past losses for inflation?

Answer: To make historical losses comparable to current dollar values

Indexing past losses to current price levels ensures severity projections reflect today's costs.

Which characteristic of loss data is required for it to be useful for forecasting?

Answer: It must be complete, consistent, and organized

Useful loss data should be relevant, complete, consistent, and organized so that patterns can be analyzed reliably.

A risk manager plots claim counts against time and fits a line to project next year's losses. This technique is called:

Answer: Trend analysis

Trend analysis identifies patterns in historical data, often via regression, to forecast future losses.

Which situation is BEST suited to a normal probability distribution?

Answer: Many independent, similar events producing symmetric outcomes

The normal distribution fits symmetric outcomes from many independent factors, unlike skewed severity data.

In ARM analysis, which dimension refers to WHEN a loss payment will actually be made?

Answer: Timing

Timing considers when losses are paid, since delayed payments allow funds to earn investment income in the meantime.