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Chapter 4 Appendix • Risk Management Application Problems Copyright © 2011 Pearson Prentice Hall. Chapter 4 Appendix • Risk Management Application Problems Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Loss Forecasting • Probability distributions commonly used in loss forecasting include: – Normal – Loss Forecasting • Probability distributions commonly used in loss forecasting include: – Normal – Binomial – Exponential – Poisson • The normal distribution is used in many situations Copyright © 2011 Pearson Prentice Hall. All rights reserved. 4 A-2

Exhibit A 4. 1 Areas Under the Normal Curve (One Tail) Copyright © 2011 Exhibit A 4. 1 Areas Under the Normal Curve (One Tail) Copyright © 2011 Pearson Prentice Hall. All rights reserved. 4 A-3

Time Value of Money • When decisions involve consideration of cash flows over time, Time Value of Money • When decisions involve consideration of cash flows over time, the interest-earning capacity of money must be taken into account Copyright © 2011 Pearson Prentice Hall. All rights reserved. 4 A-4

Other Risk Management Applications • An accurate forecast of the timing and magnitude of Other Risk Management Applications • An accurate forecast of the timing and magnitude of claims is especially important when losses are retained • The ability to forecast ultimate claims for liability lines is an important skill for the risk manager – Loss development factors are multipliers that can be applied to claims settled to date to estimate the ultimate claims for a period • When pricing catastrophe bonds, the probability of various loss contingencies must be considered Copyright © 2011 Pearson Prentice Hall. All rights reserved. 4 A-5