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Let's use the following formula to define objective risk factor. 1/(square root of number of homes insured) For example 100 homes insured against fire. Objective
Let's use the following formula to define objective risk factor. 1/(square root of number of homes insured) For example 100 homes insured against fire. Objective risk factor would be 1/(square root of 100) Objective risk = (1/10) Objective risk factor = .1 or 10%. This means that expected losses and actual losses are expected to differ by 10%. The way this factor is used follows: Multiply the factor by the expected losses. Let's say expected losses are 100 homes out of 10,000 insured. This is 1%. 100 homes x 10% = 10 Homes. This is the average variation from the expectation. If the portfolio is 1,000,000 homes the objective risk factor is 1/(square root of 1 million) = .1% Multiply this factor by the expected 1% loss. (Expected loss has not changed) 1% of a million homes is 10,000. .1% x 10,000 = 10. This is a much smaller variation from expected losses. It would be 10,000 + 10 or 10,000 10. This gives the insurance company much more confidence in its financial position. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Use this table in questions that refer to "table in instructions". pool 1 pool 2 pool3 pool 4 pool 5 pool 6 pool 7 pool 8 pool 9 pool 10 portfolio number of homes insured 10,000.00 100,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 100,000.00 expected loss 100 1000 100 100 100 100 100 100 100 100 1,000.00 expected percent loss 1 00% 1.00% 1 00% 1 00% 1.00% 1 00% 1 00% 100% 1 00% 1 00% 1.00% actual loss 110 93 100 109 109 97 90 104 94 101 1007 variation of loss from expected 10 7 0 9 9 -3 -10 4 -6 1 7.00 percent variation 10.00% 7.00% 0.00% 900% 900% 300% 10.00% 400% 6.00% 1 00% 0.70%
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