Page 67 - ic92 actuarial

Foundations of Casualty Actuarial Science

from larger asset casino to smaller asset individual. This
type of speculative risk actually increases the chance
of loss to an individual.

Q4. Define risk theory. What are the uses of risk
theory in risk management?

Ans. Risk theory is the use of mathematical models to quantify
objective risks. In other words, it is the determination of
subjective risk for a particular person or entity. Risk
theory is part of the mathematical subject of stochastic
processes that are also applied to physical sciences and
finances.

The two major areas of risk application are in
statistics and in finances.
(i) The statistical area involves using the properties of

statistical distributions to model the objective risk,
i.e, this often involves the use of confidence intervals,
which indicate the likelihood that actual outcomes
will fall within specified limits. The two main
statistical applications are for ratemaking and for
assessing financial solvency. In ratemaking , the use

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