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Empirical DF
100.00%
Cumulative probability
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1 10 100 1000 10000 100000 1000000 10000000
100.00%
Cumulative probability
99.50%
99.00%
98.50%
98.00%
97.50%
0 500000 1000000 1500000 2000000 2500000
Loss Severity
Lognormal?
Pareto?
Gamma?
Weibull?
7 PricewaterhouseCoopers
What is Extreme Value Theory?
Not so useful in
Insurance?
PBH Theorem
GPD
Empirical DF
100.00%
Even more
90.00%
80.00%
70.00%
60.00%
50.00%
GPD
40.00%
30.00%
Normal 20.00%
10.00%
0.00%
1 10 100 1000 10000 100000 1000000 10000000
11
Generalised Pareto Distribution
Cumulative Distribution
– m = location 80%
– s = spread 60%
40%
– g = shape
20%
– u = threshold
0%
0.1 1 10 100
98%
96% Gamma
GPD
94% Data
92%
90%
0 100000 200000 300000 400000
Claim Size
Higher Threshold
Lower Threshold Smaller Model error
Larger Model error
Less Data
More Data Larger Parameter error
Smaller Parameter error
1
0.8
0.6
0.4
0.2
0
0 2000 Decreasing
4000 6000 Threshold
8000 10000 12000 14000
Increasing Model Error
Exceedences
Decreasing Parameter Error
Intro Context EVT Example Discuss
Simple Conclusion
• Applications?
• Concerns?
• Questions?
• McNeil AJ Estimating the Tails of Loss Severity Distributions using Extreme Value Theory ASTIN Bulletin,
Vol. 27 no 1, pp 117-137. http://www.casact.org/library/astin/vol27no1/117.pdf.
• J. Beirlant, G Matthys, G Dierckx, Heavy Tailed Distributions and Rating,ASTIN Bulletin, Vol 31, No 1, pp 37-
58, May 2001 (Comprehensive list of references)
• Patrik P and Guiahi F, An Extrememly Important Application of Extreme Value Theory to Reinsurance Pricing,
1998 CAS Spring Meeting Florida (A presentation of the analysis of ISO claims severity)
• McNeil AJ and Saladin T, The Peaks over Thresholds Method for Estimating High Quantiles of Loss
Distributions, 28 ASTIN Colloquium 1997 (POT method used in pricing reinsurance)
• Embrechts P, Kluppelberg C, and Mikosh T, Modelling Extremal Events, Springer Verlag, Berlin 1997 (The
major text book on the subject)
• Reiss R, and Thomas M, Statistical Analysis of Extreme Values, Birkhauser, Basel, Boston, 1997