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Pr = probability
k = number of claims per year
y = expected number of claims
One of the most attractive feature of Poisson distribution
is that one parameter describes both the mean and the
variance of the distribution. The closeness of fit of the
Poisson distribution to the historical data can be checked,
generally using the mean of the data set as the expected
value for Poisson distribution. So, we can see that the
risk theory leads to a slightly different answer than
reliance only on history. So the accuracy of the estimate
mainly depends on the model chosen to describe the
claim frequency.
Q17. What is Binomial distribution?
Ans. Binomial distribution is a common function to show the
probability of the number of occurrences and expected
solvency of the insurer. Its function is :
Pr(k) = N pk qN-k
(k)
Where
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