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Foundations of Casualty Actuarial Science

factors , resulting in erroneous experience losses, is an
example of parameter risk.

Process risk, in contrast, is the risk associated with
the projection of future contingencies that are
inherently variable. Even if we properly evaluate the
mean frequency and mean severity, the actual
observed results generally vary from the underlying
means.

Q13. What is ruin theory approach?

Ans. One method for determination of an appropriate profit
and contingencies provision is the ruin theory approach.
This method involves the development of a probabilistic
model of the insurance operation and then, generally
through Monte Carlo simulation, determining the
probability of ruin (insolvency) over a fixed period of
time.

A maximum acceptable probability of ruin is then
determined and the rate level assumption underlying
the model is adjusted to the minimum rate level

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