Page 1 of 1
Discussion 4.5: Consider two competing insurance companies, A and B. Company A covers two independent risks, the loss fr
Posted: Tue Jul 12, 2022 11:37 am
by answerhappygod
- Discussion 4 5 Consider Two Competing Insurance Companies A And B Company A Covers Two Independent Risks The Loss Fr 1 (297.02 KiB) Viewed 33 times
Discussion 4.5: Consider two competing insurance companies, A and B. Company A covers two independent risks, the loss from each of them following a N(μ=10000,σ2=10000) distribution. Company B also has two risks, and each follows a N(μ=10000,σ2=7500) distribution. Due to B's stricter underwriting and selection criteria, the variance of its policies is lower. However, this has also caused the policyholders to be drawn from a narrower population of individuals. Hence, the two risks are not independent and have a correlation of 0.5. 1. Compute and compare the expected value and variance of the average loss for each company. 2. List some real world examples of when an insurance company may face highly correlated risks.