Page 123 - RISK Management IC 86

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A probability distribution is a presentation of all possible
outcomes of a particular set of circumstances and the
probability of each outcome.

Most probability distributions encountered in risk
management are not symmetrical. Distributions of
numbers of losses, or amounts of losses, in a given time
period tend to peak at relatively low probability of large
number of losses.

Sometimes, the probability distribution may suggest a
degree of precision, however, when the loss data is limited,
there may be a short series of loss figures from which to
estimate the loss probability. If this data is definitely
distinctive, then it cannot be applicable to general
forecasting, or detailed probability distribution.

The probability distribution illustrates two
characteristics,
(i) Central tendency or clustering and
(ii) Dispersion or variability, which are vital tools in

forecasts of average levels of losses and
excessive losses, both crucial forecasts in risk
management.

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