Maxentropic approach to decompound aggregate risk losses

A risk manager may be faced with the following problem: she/he has obtained loss data collected during a year, but the data only contains the total number of events and the total loss for that year. She/he suspects that there are different sources of risk, each occurring with a different frequency, and wants to identify the frequency with which each type of event occurs and if possible, the individual losses at each risk event. The purpose of this methodological note is to examine a combination of disentangling and decompounding procedures, to get as close as possible to that goal. The disentangling procedure is actually a two step process: First, a preliminary analysis is carried out to determine the number of risks groups present. Once that is decided, the underlying model for the frequency of each type of risk is worked out. After that we use the maxentropic techniques in the decompounding stage to determine the distribution of individual losses that aggregated yield the observed total loss. (C) 2015 Elsevier B.V. All rights reserved.

model; density; frequency disentangling, decompounding, density of individual losses, maximum entropy

Maxentropic approach to decompound aggregate risk losses Articles