is a measure how close a group of individual measurements is to its expected value.
coefficient of variation
standard deviation is expressed as percent of the mean , the result is the
coefficient of variation
one way to characterize the concept of mathematical risk to the insurer.
LESS RISK(LESS VARIATION)
If losses from a group of exposure units have a low coefficient of variation , there is _ associated with the group exposure than with another with a high coefficient of variation .
NORMAL DISTRIBUTION
§can be employed in more situations and in more versatile and often more realistic than the binomial distribution.
normal distribution
With the _ , variables may be continuous , having a value of any number from zero to infinity
POISSON DISTRIBUTION
is another theoretical distribution of probability that is used in risk management applications .
§The mean of the poison distribution is also its variance
The standard deviation is equal to √
as the number of exposure units increases and the probability of loss decreases, the binomial distribution approaches the Poisson Distribution as a limit .
law of large numbers
states that as the number of exposure units ( in other words , persons or objects exposed to risk) increases, the more certain it is the actual loss experience will equal probable loss experience . Hence , the degree of objective risk diminishes as the number of exposure units increases.
DEGREE OF RISK
is the range of variability around the expected losses . Using the chance of loss concept, it is calculated by means of this formula :
NUMBER OF EXPOSURE UNITS ( N)
This is based on the knowledge that the normal distribution is an approximation of binomial distribution and that known percentage of losses will fall within 1, 2,3 or more standard deviations from the mean.
NUMBER OF EXPOSURE UNITS ( N):
N = (S2p( 1-p))/E2
Chance of loss
§Defined as the long term chance of occurrence of loss, or relative frequency of loss.
chance of loss
•Quantitatively, this is measured by dividing the probable number of losses by the number of buildings exposed to loss.
PERIL –is used to describe a specific contingency that may cause a loss .
HAZARDS
– conditions that either increase the chance of loss form a particular peril or tend to make the loss sever once the peril has occurred .
Physical hazard
1.is a condition stemming form the material characteristics of an object.
MORALE HAZARD
- Refer to the mental attitude of a careless or accident prone person.
MORAL HAZARD
§ the condition that stems from an individual’s mental attitude .§It is associated with intentional actions designed either to cause a loss or to increase its severity
§Moral hazards
are typified by individuals from known records of dishonesty. In addition, the existence of insurance may sometimes exacerbate the existence of moral hazards.