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CHAPTER 4 INTRO TO ACTUARIAL SCIENCE QUESTIONS AND VERIFIED ANSWERS|100% CORRECT|GRADE A+
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CHAPTER 4 INTRO TO ACTUARIAL SCIENCE QUESTIONS AND VERIFIED ANSWERS|100% CORRECT|GRADE A+
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CHAPTER 4 INTRO TO ACTUARIALSCIENCE QUESTIONS AND VERIFIED
ANSWERS|100% CORRECT|GRADE A+
most important risk management concept - ANSWER diversification of risk
Pooling arrangements (or risk pooling arrangements) - ANSWER reduce risk when losses are independent
(uncorrelated)
the individuals in the pool agree to evenly spit any accident costs that they might incur- they agree to
share the losses equally, each paying the average loss
the pooling arrangement changes the distribution of costs paid by each person- since the costs of one
now depend on the accident losses incurred by another
since the losses incurred by one person is independent of the other person's losses- the probability that
neither person has an accident is the probability that one does not have an accident times the
probability that the other does not have an accident
the pooling arrangement changes the probability distribution of accident costs facing each person- in a
pooling arrangement the standard deviation lowers while the expected cost does not change
pooling arrangements reduce the risk (uncertainty) for each individual- shows how risk can be reduced
through diversification- if people do not enter a pooling arrangement their accident costs would equal
their own losses- the average loss is more predictable than an individuals losses
it reduces the risk for each participant
if the distribution is very skewed - ANSWER there is a high probability of zero loss and a much smaller
probability of a large loss
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