One of the most popular risk models for pricing is the collective risk model for total losses, S.

a. Explain what the collective risk model is and what its underlying assumptions are.

b. Discuss the validity of the collective risk model’s assumptions when used to model employers’ liability losses.

c. One method by which it is possible to approximately calculate the distribution of S when (as is normally the case) an exact solution is not available is Monte Carlo simulation. Outline the workings of this method, including an explanation of how the 95th percentile of the aggregate loss distribution can be derived. Note: This will be addressed at length in Chapter 17.

d. State two other methods that you could use for approximately calculating the distribution of S. Note: This will be addressed at length in Chapter 17.