Estimating Aggregate Loss Probability and Increased Limits Factor

Aggregate loss probability is an effective tool in actuarial rate making, risk charging, and retention analysis for both primary and secondary insurance companies. A noticeable trend over recent years indicates that it also is becoming an indispensable element in the risk management operations of many manufacturing and commercial firms. Some major insurance brokerage houses in the U.S., in step with the trend, already employ this technique routinely in selecting a retention plan for their clients. In its broadest form, the application extends beyond the actuarial domain into the broader area of corporate financial planning. Must existing procedures for estimating aggregate loss probability distributions have significant disadvantages. Most often, these disadvantages are associated with inadequate treatment of skewed data. the purpose of this paper is to present a recently developed technique which seems to handle the aggregate loss estimation problem more effectively. The first section presents a brief review of the strength and weakness at most popular techniques currently in use. This is followed by a brief description of the newly developed technique. Next, the results of a comparative study of the cost and effectiveness of these alternative procedures are reported. Finally, we illustrate the impact of improved aggregate loss estimation on the pricing of reinsurance. An appendix contains the mathematical derivation for those who would like to verify our results. Reinsurance Research - Loss Distributions, Size of