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Loss Modeling Using Spreadsheet‐Based Simulation
Author(s) -
Joaquin Domingo Castelo
Publication year - 2007
Publication title -
risk management and insurance review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 16
eISSN - 1540-6296
pISSN - 1098-1616
DOI - 10.1111/j.1540-6296.2007.00119.x
Subject(s) - toolbox , payment , computer science , process (computing) , value (mathematics) , aggregate (composite) , actuarial science , simulation , economics , operating system , world wide web , machine learning , programming language , materials science , composite material
With the dramatic increase in the speed of personal computers and steep decline in the cost of computing, simulation has become one of the standard tools in the risk manager's toolbox and should now become one of the standard tools in the risk management and insurance student's toolbox. This teaching note aims to facilitate this process by showing how to create and run a simulation in a spreadsheet environment, and interpret simulation results to gain insight and understanding about a real‐world problem. Specifically, this teaching note provides step‐by‐step instruction for simulating the present value of payments for losses occurring within a 1‐year policy period. Losses are covered by an aggregate excess of loss treaty. The uncertainty lies in the frequency and severity of losses as well as in claim processing time, and also in the discount rate for calculating the present value of loss payments.