Exam C

Raise Your Odds with Adapt

SEVERITY,
SEVERITY, FREQUENCY
FREQUENCY & &AGGREGATE
AGGREGATE LOSS
LOSS Variances Frequency: Exposure & Coverage Modification
Basic Probability Variance of the Sample Mean Poisson Binomial Neg. Bin.
Probability Functions For independent and identically distributed Original
&
(i.i.d.) random variables, the variance of the sample Exposure R , ,
= = Pr qrs Y
'( mean is Var = . Pr > 0 = 1
d
= 1 = Pr > Exp. Mod. ? ? ?
Bernoulli Shortcut , ,
probability = Exposure ? R R R
= = Pr > 0 = 1
probability = 1
& ? Cov. Mod.
= = ln ; = '8 &
Var = 1
Exposure R , ,
'( Conditional Variance Formula Pr > 0 =
Moments VarY = VarZ EY + EZ Varz
( Aggregate Loss Models
Aggregate Losses <
E = If = R + ? + + { and o are i.i.d, then:
'( Pr = = Pr = Pr o =
kth raw moment: <= = E < E = E E
< oR
kth central moment: < = E < Var = E Var + Var E ? =
Variance: ? = ? = E ? = E ? ? Policy Limits Risk Measures
( (
is coherent if it satisfies:
Coefficient of variation: = E < = < = <'R
} } Translation invariance: + = +
S
Skewness: R = S E <
= < + < 1 Positive homogeneity: =
Subadditivity: + +
V }

Kurtosis: ? = V Monotonicity: If , then () ()
= <'R
Covariance: Cov , = E Y Z } VaR _ = _ = Y'R
= E E E If = 1 + , then: TVaR _ = E > VaR _
,
E = E 1 + = 1 + E E E VaR _
Correlation coefficient: YZ = 1 + = VaR _ +
Y Z 1
Deductibles
Percentiles VaR _ TVaR _
Payment per Loss
100pth percentile _ is any point satisfying
= _
_' and _ . If is continuous, _ is Normal + _ +
Z = Y + 1
a unique point satisfying _ = . ( (
E = = _
Mode Lognormal E
Mode is x that maximizes .
1
= E E
Moment Generating Function Tail Weight Measures
Payment per Payment
Y = E cY 1. More positive moments lower tail weight
d
= > & &
Y 0 = E d where d is the nth derivative Y + Y 2. If lim > 1 or lim > 1, then numerator
&( & &( &
Probability Generating Function Z =
1 Y has higher tail weight.
Y = E Y E E E 3. Increasing lighter tail
d
Y 1 = E 1 + 1 = Y = = 4. Increasing Y heavier tail
Y Y
d
where Y is the nth derivative Special Cases
Conditional Probability Exponential: Y =
Pr EMPIRICAL MEMPIRICAL ODELS MODELS
Pr = Uniform on 0, : Y = , < Review of Mathematical Statistics
Pr 2
, + Bias
Y = Two-parameter Pareto: Y = bias = E
1
Consistency
Bayes Theorem Single-parameter Pareto: Y =
Pr Pr 1 is consistent if:
Pr = Franchise Deductible lim Pr d < = 1 for all > 0, or
Pr 0 d(
Z Y = bias 0 and Var 0
Y = >

Z E = E + Mean Square Error
?
Law of Total Probability Loss Elimination Ratio MSE = E
Discrete E ?
LER = = Var + bias
Pr = Pr o = Pr o Pr o E
Severity: Coverage Modifications Empirical Distribution for Complete Data
o o
: deductible, : maximum covered loss Individual Data
Continuous #{o }
= ( ) d =
Pr = Pr E = E E
If coinsurance factor = : Grouped Data
Conditional Expectation Formula Assume data are uniform on each interval and
EY = EZ EY E = E E
If inflation rate = : interpolate linearly between endpoints of
intervals.
E = 1 + E E
1 + 1 +

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Variance of Empirical Estimators with Moments of ernel-smoothed Distributions Variance of Maximum Likelihood Estimators
Complete Data If is the ernel-smoothed distribution and is Fishers Information
d 1 d the empirical distribution, then use the conditional ne variable
Var d = expectation and conditional variance formula to = EY == , Var = 'R

calculate E and Var . Two variables
Cov , = , < If is uniform ernel-smoothed: ? ?
R , ? R , ?
aplan Meier and Nelson alen Estimators ? ?
Var = Var + R R ?
aplan-Meier (a. .a. Product Limit) Estimator R , ? = EY ? ?
'R If is triangular ernel-smoothed: R , ? R , ?
d = 1
o
, 'R < ? ? R ??
o Var = Var + Covariance matrix of the MLEs = 'R R , ?
oR
Nelson- alen Estimator Mortality Table Construction Delta Method
'R Individual-data-based Method ne variable
o ?
= , 'R < = number of years Var Var =
o Exact exposure
oR
d
Two variables
Variance of aplan Meier and Nelson alen ' ? ? ?
Estimators = 1 , Var = 1 Var , Var
?
Variance of aplan-Meier Estimators
Actuarial exposure ?
Greenwoods approximation: +2Cov , + Var
1
Var d = d ?
= , Var =
Fitting Discrete Distributions
c
Interval-based Method Two methods to fit data to an , , 0 class
Variance of Nelson- alen Estimators distributions:
= 'R + 'R 'R 'R 'R +
o Exact exposure Method 1: Compare ? to .
Var = d
o? = + 0 Method 2: Calculate for the first few
oR d

Log-transformed Confidence Interval for d Actuarial exposure values of and observe the slope of the line
d R , d where = + 0 created from these values
Method Method
R_ ? Var d Binomial ? < Negative
=e p PARAMETRIC PARAMETRIC
MODELS MODELS Poisson ? = ero
d ln d
Method of Moments Neg. Bin. ? > Positive
Log-transformed Confidence Interval for To fit a -parameter distribution, set: ypothesis Tests
d
1 = 1
, w ere = o for = 1, 2, , Plots

oR = d
R_ Var Percentile Matching - Plots
?
=e p Smoothed Empirical Percentile o
Plots empirical distribution, d o = , on x-axis
_ = + 1 observation dR

If + 1 is not an integer, interpolation between and fitted distribution on -axis.

ernel Smoothing the order statistics before and after the + olmogorov-Smirnov Test
Density and Distribution Functions 1 observation. Test statistic, = ma o where
& : ernel density function for point o , Percentile Matching with Incomplete Data o = ma d , d '
evaluated at ith censored data, select percentiles within the nly for individual data
& : ernel distribution function for point o , range of the uncensored observations Lower critical value if <
evaluated at ith truncated data, match the percentiles of If parameters are fitted, critical value should be
: bandwidth the conditional distribution. lowered
: PDF of the ernel-smoothed distribution Maximum Likelihood Larger sample size has lower critical value
: CDF of the ernel-smoothed distribution Steps to Calculating MLE niform weight on all parts of distribution
= d o & 1. = 3. Set = = 0 Chi-square Test
< ? <
&
2. = ln 4. Solve for ?

Li elihoods Test statistic, = =

= d o
& Individual Data R R
&
ight-censored at () If parameters are estimated using the same data
niform ernel Left-censored at () used to calculate the test statistic, then there are
1 1 degrees of freedom.
& = , o o + ight-truncated at
2 May be used for individual or grouped data
o Left-truncated at
& = , o o + Left-truncated at and No ad ustments on critical value if <
2 If parameters are fitted, critical value is
Triangular ernel right-censored at
Grouped Data automatically ad usted
o +
, o o 'R Critical value is independent of sample size
& = ? igher weight on intervals with low fitted
+ o + Grouped data between and and left-
, o o + probability
? truncated below at :
Li elihood atio Test
se area of triangles to calculate & . MLE M M Test statistic = 2(ln R ln } )
1 Poissons lambda
eig t = , base goes from R to R + Degrees of freedom = free parameters in
Binomials ( is nown) alternate free parameters in null
Negative binomials and (empirical variance Critical value from Chi-square distribution
> empirical mean) Schwarz Bayesian Criterion
Gammas ( is nown)
Penali e value = ln ln , w ere
Normals and 2
= number of ata points
= number of parameters in model
Choose model with highest penalized value.

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CREDIBILITY CREDIBILITY Con ugate Priors Estimating
Limited Fluctuation Credibility Poisson Gamma niform exposures:
Full Credibility If Poisson , and amma , = 1 : o ?

Basic premise: Pr = + = ? =
Posterior amma 1
where = frequency, severity, or aggregate loss = + oR

= Non-uniform exposures:
= fre uency Predictive eg in ?
= 1 oR o o 1
= severity =
1 + Normal Normal 'R ?
oR o
R_ ? = 'R If ormal , , and ormal , :
2 +
Number of claims needed for full cred. of =
R_ ? ? ? Posterior ormal + SIMULATION SIMULATION
Number of
= = Inversion Method
claims + o = 'R o
R_ ? ? ? = Special Techniques
Claim size = Predictive ormal ?
? = + Multiple Decrements
R_ ? ? ? ? Bernoulli Beta o'R
Aggregate o
= + If ernoulli , and eta , , : o inomial = , =
losses ? o'R
= + 1 R
Posterior eta R
If frequency is Poisson, then = ? . = +
Simulating , , 0 Class Distributions
Number of exposures needed for full credibility: Predictive ernoulli = ln 1 <
+ < =
<
= Exponential Inverse Gamma
If E ponential , and Distribution

Partial Credibility nverse gamma , : Poisson

= + 1 = + = + Binomial ln 1 + ln 1
Posterior nverse gamma
= umber of claims observe = + Neg. Bin. ln 1 + + ln 1 +
= Start at = 0. Calculate d<} < until the sum
=
, <
Predictive 2-parameter Pareto =
exceeds 1. The simulated value is .
1,
B hlmann Credibility Normal andom Variables: The Polar Method
Bayesian Estimation and Credibility = E pecte ypot etical Mean E M Transform uniform random numbers on 0, 1 , R
Density
= E E and ? , to uniform random number on 1, 1 :
= Prior ensity
= E pecte Process Variance EPV R = 2R 1, ? = 2? 1
= Con itional ensity
R , , d = Uncon itional ensity = E Var
2 ln
= Variance of ypot etical Mean V M f = R? + ?? 1, t en =
= R , , d (Continuous)
= Var E
Standard normal random numbers: R and ?
= R , , d ( iscrete) = , = = Number of Data Values to Generate
+ +
= + 1 Number of runs, , needed for sample mean to
R , , d = Posterior ensity is the number of period if represents be within 100 of true mean with level of
R , , d
= frequency, such as number of claims per month, or confidence is such that:
R , , d aggregate losses, such as total losses per month d
d
oR o
?

dR R , , d = Pre ictive ensity R_ ? , w ere d? =

is the number of claims if represents severity, 1
= dR R , , d Continuous such the claim size. Number of runs, , needed for sample
nder B hlmann Straub credibility, is the proportion to be within 100 of with
= dR R , , d ( iscrete) number of exposures. level of confidence is such that:
Empirical Bayes Non Parametric Methods
Bayesian credibility estimate of dR niform Exposures R_ ? ,
d
= Mean of pre ictive istribution 1 1
= E dR R , , d = = o w ere =

oR R
Loss Functions d Applications
1 ? If = order statistic from the sample and =
Bayesian = o o
Type of Loss ( , ) 1
Estimate, oR R + 1, then:
d
? Mean of o< o
Squared-error 1 ?
VaR _ = < , TVaR _ =
posterior = o + 1
1 ?
Median of oR ?
_ + TVaR _ VaR _
Absolute Non-uniform Exposures Var TVaR _ =
posterior d + 1
R o o
d
1 if Mode of oR
1 ?
ero-one = = w ere _ ? = o TVaR _
0 if = posterior
d ?
R o o o
o<
oR
= Bootstrap Approximation
oR o 1 : Parameter of distribution
?
oR o o 1 : Estimator based on sample of size
=
'R oR o?

The bootstrap approximation of the mean square

Note: If < 0, then set = 0 and = 0.
error of as an estimator of is:
Empirical Bayes Semi Parametric Methods
MSE = E ?
Estimating and
Model
o Poisson
o eg in , 1 +
o amma ,

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