Course objective

MTH223 Mathematical Risk Theory

Chapter 1: Introduction and Overview

Xi’an Jiaotong-Liverpool University

Dr Jiajun Liu

Dr Jiajun Liu (XTJLU) MTH 223 1/8

Course objective

Course objective

Course objective

Course objective: Construct various mathematical models which can be

used by insurers to forecast and help predict future insurance losses,
primarily in a non-life insurance framework. For these mathematical
models, develop quantitative risk measures to assist insurers in monitoring
the underlying risks.
• We are interested in quantifying and seeking protection against the
loss of funds due to too many claims or a few large claims.
• We aim at reducing the adverse financial impact of random events
that prevent the fulfillment of reasonable expectations.

Dr Jiajun Liu (XTJLU) MTH 223 2/8

Course objective

Course objective

Liability risk

This course focuses on models for liability risk, the risk that insurance
companies are assuming by selling insurance contracts. More specifically,
we focus on models for the insurance claims.

Many introduced models have also been applied for other types of risks
such as investment risk, credit risk, liquidity risk, and operational risk.

Dr Jiajun Liu (XTJLU) MTH 223 3/8

Course objective

Course objective

Aggregate claim

In this course, we are interested in modeling the total amount of claims,

known as the aggregate claim amount, of a group of insurance policies
over a given time period.

In the actuarial literature, two main approaches have been proposed to

model the aggregate claim amount of an insurance portfolio: the
individual risk model and the collective risk model.

Dr Jiajun Liu (XTJLU) MTH 223 4/8

Course objective

Course objective

Individual risk model

For individual risk model, the aggregate claim is modeled by

n
X
S= Zi , (1)
i=1

where n (a deterministic integer) denotes the total number of insurance

policies and Zi is a random variable representing the potential loss of the
ith insurance policy.

Dr Jiajun Liu (XTJLU) MTH 223 5/8

Course objective

Course objective

Individual risk model (cont’)

In reality, since a policy may not incur any loss, which means that Zi = 0
with a positive probability. Therefore, sometimes the aggregate claim
amount is expressed as
n
X
S= Xi Ii ,
i=1

where

1, if policy i experiences at least one claim
Ii =
0, if policy i does not experience a claim

and Xi denotes the size of claim(s) for policy i.

Dr Jiajun Liu (XTJLU) MTH 223 6/8

Course objective

Course objective

Terminologies

• Severity distribution: the distribution of the loss amount or of the

amount paid by the insurer on a given loss/claim.
• Frequency distribution: the distribution of the number of
losses/cliams paid by the insurer over a given time period.
• Aggregate payment(loss): the total amount of all claim
payments(losses) over a given time period.
Note that there is a distinction to be made between the aggregate
payment and the aggregate loss due to the presence of claim
adjustments (deductible, limit, coinsurance) in an insurance policy.

Dr Jiajun Liu (XTJLU) MTH 223 7/8

Course objective

Course objective

Course outline

• Review on probability theory (chapters 2; sections 3.1-3.2)

• Risk measures (section 3.5)
• Severity distributions (section 3.4; section 5.2; sections 8.2-8.5)
• Frequency distributions (chapter 6; section 8.6)
• Aggregate models (section 3.3; chapter 9)
• Continuous-time ruin model (chapter 11)
A Distribution Tables for Exam STAM is posted on course webpage, where
one can find various distributions for frequency and loss size. Throughout
the course, we refer to this table for distributions involved in any problem
or discussion, unless stated otherwise.

Dr Jiajun Liu (XTJLU) MTH 223 8/8