Betuarial Clabsties An insuiance Stem 3 a machantsm Rrovicling Pootection against Financial oss duo to Fandom evens. Tho time of OccuAANE, tho fenaqeearcy OF oceusaince ang Sized the Pinanevel loss are “ually yandom Varteble consequently tho benafie 40 be Pad 3 also & Yandemvadwable - fn Some inswronce PrOduets - he. insures has 40 fave thy insaned ang the insuyance Company Sat the conte ahd i mathematiegs theony of ingurance paov Scientific basvs @y thts douse: The Nakuxal anf Fovemast pastion that onises jp Anis theory 1s MW 40 Measu~ the adverse finanttat iMpack .ag | Veswt of Jardem everus . | ed Valuo Pine’ le. “pected vale inciple, he pacblem OME Way GL — Seyi of Of measusing he = Rnaneral impact Inthe face Ae aiPr city ay ae Se Prigject with a eandom — owkcme ° as Value fy “us expected value paincrple . hela of- possible outcomes ‘a creplaced sil ace PUA poses by a singe * qumioes ) ahs oxpect yodua. of the syandom monebony outcomes ~ In Cconomies, the escpected valus of vandgm PIo5pe wth yrondtasy pagments 1S Fmaquontly Called the Sarr oy octurial Value ob The paospect) By aWs painciple , a docrsion makey would be wndifferent between assaming the ganda loss X and paying eG) inorder 16° be qelieved of tho possible loss Similauly . @ dactgion mare? would be woilling 40 pay to B(y) 40 Participate in gamble carth stardom PayoF 4: Suppose the probability of accident in specific time Penod is oraqgand x,y and 2 ae three random variables assoerated with the ace’deat and whieh meaeure the oe4oss —incunnved 4g a dlcision maker - x Comesponds +o less of 3 lagdl-. corwvespondl to los of Rg a0,007+ and 2 Canves ponds to the lass of es 50,0001-- IP an accident does NOG occay thon, atuve ts no less This x1 and = tee Vals 9 wah probability 09@%- 16 t Posy to compute thab “E0290, EW) =d0q Ind Ee) = loao- EO) = ax 09g+% O'0QxIGag = Io EV) = ox04g 4 ovay 29,000 = 4og FG)= 00-454 ogy 50,000 = G00 thus thy expected losses in those sfuabtons PL 201409 and L009 ‘Yespectivel with the - expected Value principle vthe cyondan loss 18 Summarised by it's Sipected Volus» inchs context . of insuxance , “suppose an individoat, is Aitcaly to face the ‘polential loss discribe by By the expected Volus- paircige ON a aveyage «an tactiv’ dual hos to auffer EW) a a loss Sob Individual:so be nate ey) in onda ts be align ihe Te tha om natal i a 0 a: eMe hoo RS 08 ae ane “g ¢Z pion tm ov. a pebertial 085 4 Phau Rs Rosca’ — owenes an Is ames He nat be sabihed with £6) = “40 a5 a ere eause actosobing both expecta alas pre it aso fas te sifier leas A e(i) = 400-the company has fo make provisions Yor the expenses Aunnitg dhe basi nos paying hanes and mnaxtng a past t. Thus the compan wilt fe chasige th one Arar the oss a3 a pmomium ho coves tho vandom Hoss (P dhe individual is vot viking 40 pry mone thon. the expected does then tore Seems te be Kittle opportunity Yor a ruttoaly aclvantag ens Meuronce —cunttvact . Thus expected veulue prin fils 0 aru ab an agroarnant. betwoon insurod ‘and —(nsasor. assuming asandany[But gnorally deloiobuals as idk averse and 2. auiling fo pay mone dhan dhe. expected Joss O53 2 Phorum Thos willingness’ 03 a congeqeance oF Apptaptate meeting gts mortal behawious THe averse inolividluat | Utley Thuong uibethor 46 optim Per an fraxyanee cave & vot. depends ‘On the Trankelty individud andl also on ‘Ths. importance oy adihty of to Wal th he wants 40 induto”. : . “GE usbilty Qunction & a Sanction Which rigasiaes fe vals ov ths wbihty that en individual — attaches 40. has Wealth. this Wealtt foeludss moray, , Property, bysiness , bane deprsits CEC Buppase the Oily flak the dotsion fewer altachs $0 weabth % aroont 09. y Specified by a bunefion Us) ] % clocrole belwoan | Fanelom dosges x anol ye he Compasos Efow¥ ‘with Efy Cu -¥)] and chooses dhe loss wth ighast expected Cihty~ with This oelalithe ingasad — wrth the mascimanm paramium phe i prepassd Yo Pay tera fandom’ \ss xr TST alone ley Ben the equilibrium equation E(u CH ~) = 0 ws mH dhe equiltbavum, ho aloes rob cars in Yeoms. OF obi hey 4 te hous insured, or nat “theciadal applies £0 tha olor p Anvolvad a3 wll Thy inseies — wodh huis acon cutlity Funokton amd Perhapes Eutpplt Hashes expenses ao olatermiy ele tho. tnsurecl’'s yoser mam | a wealth ag % able to dokern, X Poomnium p premium Pe ts thon the Msarcrs sccm pasmium p™ both parties inv lwad Incnaage thota aty » le LP ths poumium ts boktueen, F and pt esha aly A socks otAhs Suan cannes ig a non ~ docneasing Concane Tunchar- Sams 017, Indeperdons Rardam Vesiatlee >, Kk feren cua) assets Fuch a Rick woke Joe dhact Fun Yortds We dhe peteryious Section, we have sean how Awe pastes corny ‘eget ark agree Jo sgn O contract In this canivact thy tnguded ts ailing *e Poy o certain amount of wonay Aody jrewey to get, compensation {yr « standoro Agss X «An WWswonce cammpan deals witha to Jok golteres Siqtultansoug ands'as, @ orsequanee as 40 face Paobable “yandom Joss as. a m5 (Or (| n eee it tt olatms 4, ply leds ais {es Tie, 40 ty indwrounee aé comyany, ulheeh CoWvesponds te ale tela) bent ts 8 . pavel on dhe ebtrny poncali OF pdhieves + "those “sioe -4wo opproaches 4a Model aby WSK tothe = Ans usonce Company - gns_ts for dea short dean, ols ; Sock; ds and the othoy for a lorg term ov Lov ay eottendad petied |’ "er a Jang beam , thease is, medolld as @ stechasbic ail. tok — A'scugs this “appaoach how -Tnthe~~ short term approach . § is modelled a3 g vv + Anoths oolvankage Gta Shank pericd Tho ons. nod not hove 0 dake in 10 Aecaun tho tine Value of moray (a concept; whieh wi Hoe discussed’), ard thu “interest calatatiims _ | gan be \gnomad: phils subject matter is dod _ | Veferrved fo as, ask, thuory In actuasua) led} Ae canary te’ thihasted in leg about the ath (of 8-) as such informatton will be halpbed to finding ouk the chance: dh event thab otal claims exceey! a centauh [Pkcod amount consaquanty » » the insu can rake O oloc'sion Yegasching tH cagh at hail to pay the possible Claims ah the tnsused [Inc Ake Fallowing We model vise geo mk modal js essentially &.madhamabrcal choge ia af the -behovieus of a collection St-aigrs genarated by an Insurance pattie :Thure ode ftwe Op proaches tov rnoolobLing the_dlb” of sMe's on individual aise ont! andthe othes Sa collective ek model «fod both the mods, he sino peated 18 aie to bea short | Fioced - perod so that ane. noid not consides the dims Valu oy, monsy “These modals are Partrealarly usetul tn cagualey insysance Such. 95” ihayane... against Pea; thoft | acoidonts, loads , tap damage ‘ore failuas «sud, Contacts ain. Usually written lov a dlativaly Short period Comay be + ong * yea’) sound ae yenawed 1€ the insured wishes +0 condinite « fs an illustwation considera egy \nsusxornce, |Podtey urd. the specified Policy condelact; ths, insured Pays at cendain . amount 25 Premium to thy Insure, at the begenning ot the period of insurance covert which iS geno A 420s. Th insured will make. « cleat R ” the cceidont ‘Yesulting in the. damage of Wu cat; oeours during ho_ yeas vith insures has to pay the bedi as olrctoled in thecontact - Thite aw two sources of uneere, \ 7s = whathr oi claim is madeov nob and . F the dalm is mace 14h amount ofthedoi, clus @ paobabitistie rrodal Fav clin Ouk go, must have ‘wo, components - @ Mody Soa frnequsnc at claims anno a. odd Roy jpevevity ot dai «the main: dlej eck tVE- ode claim: sizes a5. woll.as “of claims Je +0 dacibolo how pee mia an be charg ed _ te avoid atin op the insurance cornipany, Pr Trekividua) Ak! mele In “this “madlal tae aggre ‘ate’ clowm, amount Gam o portfolio is congicleved ao *he ‘sum | oh dhs lait amounts fom he Invi ogles:in Are porbiio te 13 “assumed that “|'the number‘ot’ ‘“inguiedls 1 oy. Known ancl Riocedat the beginning of tho pealsat - Thos no migiatien ih and out oF tha. InsuiLance J eyetem that & it @ clase modbl suppose ee ae —-~ sXi_danotes tho toss of i ingunad hake (8, dinates he claim iy made in hak Period. S=\12,----» then S,= Rtht~—- Akh, donates tho total latin during tho ported eis to be noted that some ch athe xX; in Sy Wray be o ih dai in the given pestod does Rot arise “rem the pahiey Hence, each camponont, X- in S {3 expacessi ble as X=1B- Mbt whan Tis the indicator function & claims , ie, Tet, Rare clin ts made and is 6 Sw Suppose PLD ~ qaric p [1=0} ocqer Bis the Toondon — Vaiable specifying the amount’ of claim, provided the dain vs made euppam He ECBIE=) ak 2 Vor Cole «)) Some ingwiance products, Abs. behi}it amour t ts fixed: Tr such Bituakions, @ ts ¢ degonstal yandom Vaulable , olegenoate a hk with =o. Fallsaing C8 Some illustwatsions .i) Ina one gear team insusance, the 'n5uye | agrees de pag an” amount of Rs io,000 | l Tho inured dyes with in @ yeas oe tte poliey lssue ard 4 pay nothing ie the inswad survives the yea Buppase the Perdbodbihty of tho clatin betng mode & | oon that 1s e(r-i]eoca, Than X & a av wrth poiabab ity mass unet'on quia by 7 P [x =[01000) = p [1-7]=0+08 ard P Lxed] = [2-dJ= agg.’ yo ba naneveloh”: @